As hospital-based health systems continued to consolidate in 2021, the mergers and acquisitions that took place last year continued to shrink in number, while growing in the size of the organizations involved. That two-sided trend makes a lot of sense, given how consolidated the industry already is, a new report from the Chicago-based consulting and services firm Kaufman Hall notes. The report, entitled “2021 M&A in Review: A New Phase in Healthcare Partnerships,” was authored by Anu Singh.
In releasing the report on Monday, Jan. 10, Kaufman Hall stated that “Hospitals and health systems experienced significantly fewer mergers and acquisitions (M&A) in 2021, but deals involved notably larger health systems and higher revenues, according to a new analysis from industry consultant Kaufman Hall. Eight of the 49 transactions announced in 2021 (16.3%) were “mega mergers,” in which the smaller partner or seller has average annual revenues over $1 billion. This was nearly double the percentage from 2020 (8.9%) and the highest in six years.”
Furthermore, the firm stated, “Other notable trends include hospitals’ greater focus on core markets and assets, strengthening intellectual capital resources, and addressing societal issues and underserved populations. These trends are expected to continue into 2022, and healthcare systems’ strategies going into the new year are expected to be influenced by three key lessons from the pandemic:
Ø Realize the imperatives of scale. Larger health systems were better positioned to respond to the pandemic and weather its impacts.
Ø Focus on core markets and services. Pandemic disruptions and financial pressures made non-core assets and markets less attractive, prompting a shift to more core markets and services.
Ø Seek innovative partnerships. Health systems are increasingly seeking opportunities to offer new services to consumers or enhance delivery for specialized services.”
What’s more, the firm stated, “Researchers say these trends point to a larger process of transformation in the industry, as the pandemic continues to reshape the healthcare system.”
As the introduction to the report notes, “Throughout 2021, there was one consistent trend in partnership, merger, and acquisition transactions between hospitals and health systems: the number of transactions was down, but the size of transactions was up. The process of industry transformation continues as the impact on transaction activity evolves. As noted in our Q3 2021 report, several factors are driving these changes. There are fewer independent, unaffiliated community hospitals seeking partnerships. Organizations are focused on partnerships with a strong strategic rationale and have become increasingly selective in identifying potential partners. They seek partnerships that will have a transformative impact through the addition of new capabilities, enhanced intellectual capital, and access to new markets or services.”
Indeed, the introduction stated, “One of the major trends we discussed in our 2020 year-end report—a focus on core business strengths—continued into 2021, as did the trend toward strengthening intellectual capital resources, complementing core expertise, and increasing cross-vertical capabilities. Trends we anticipated for the year played out, with a growing diversity of partnerships often focused on attaining deeper and more effective service offerings, as discussed in our Q3 2021 report. We also expect a greater emphasis on partnerships that can help address broader societal issues and the needs of underserved populations.”
The numbers tell the story: Kaufman Hall’s analysts recorded 117 health system mergers and acquisitions in 2017, 90 in 2018, 92 in 2019, and 79 in 2020, but only 49 in 2021. Yet at the same time, the report notes, “Eight of the announced transactions in 2021 were ‘mega mergers’ (transactions in which the seller or smaller partner by revenue had more than $1 billion in annual revenue). This year had the largest percentage of announced ‘mega merger’ transactions in the last six years at 16.3 percent, almost double the percentage (8.9 percent) in 2020.”
What’s more, “Organizations with high credit quality were the smaller partner in a significant percentage of 2021 announced transactions, in line with 2020 levels and historical peaks. In more than one out of every 10 transactions, the smaller partner had a credit rating of A- or higher in 2021.” And, “As previously mentioned, the number of transactions in 2021 was down; however, the average size of smaller partner by annual revenue increased significantly to $619 million, up from $388 million in 2020. Since 2011, average smaller partner size by annual revenue has increased at a compound annual growth rate (CAGR) of approximately 8.0 percent.” In other words, as the report notes, these are much bigger organizations to begin with. And, very significantly, the report notes, “Activity by not-for-profit health systems as both acquirer and seller increased as a percentage of total transactions in 2021. Combined, transactions involving a not-for-profit partner represented 87 percent of announced transactions, compared with 81 percent in 2020.”
The report looked at the ten largest transactions of 2021, and found interesting insights, emphasizing that “Some of 2021’s most significant transactions involved the sale of regional or market-concentrated facilities or assets in what appears to be a rebalancing of the core portfolio of multi-regional health systems.” Just to cite two of several example, the report noted that:
Ø In south Florida, Tenet Healthcare Corporation announced the sale of five hospitals and associated physician practices in Miami-Dade and southern Broward County to Steward Health Care for approximately $1.1 billion. The acquisition doubled the size of Steward’s presence in Florida, adding to the five hospitals it already operated in and around Melbourne and the Space Coast. The sale did not include Tenet’s ambulatory surgery centers in south Florida, which are separately operated by United Surgical Partners International.
Ø In northern Georgia and Macon, HCA Healthcare sold four hospitals to Piedmont Healthcare for approximately $950 million, noting that the hospitals “were not able to fully benefit from a broader HCA presence in their areas.”
Ø At the same time, HCA continued to grow its presence in southeast Georgia, with the purchase of Meadows Regional Medical Center in Vidalia, Ga.”
In examining what’s been going on, the report noted that the 1980s and 1990s saw independent hospitals combine into healthcare systems “in an effort to contain rapidly rising healthcare costs and to respond to the new demands of managed care,” while during the 2010s, following the passage of the Affordable Care Act, hospital-based organizations combined “to accelerate access to key resources to prepare for population health, tighter integration of healthcare services, and assumption of risk.”
In the past few years, however, the biggest driver of consolidation has been “the ongoing movement of care from inpatient to outpatient settings, technological change, and the push toward consumerism in healthcare created opportunities for legacy healthcare providers as well as new providers who could focus on a specialized segment of the market for healthcare services (e.g., primary care, behavioral health, ambulatory surgery, telehealth, home health, chronic care management, etc.) without bearing the high costs of providing acute inpatient services. As the Affordable Care Act’s encouragement of integration of services across the care continuum took hold, new industry participants were bringing focus and optimization in singular service lines, which is now opening up avenues to optimize various service providers in a single coordinated model,” it notes.
