Strategy a key factor in healthcare M&A in Q2

Mergers and acquisitions among hospitals and health systems were slower in the second quarter than in the first, but a trend emerged: While the quarter saw a few “megamergers” — deals in which a smaller entity achieves annual revenues of $1 billion or more — organizations tended to prioritize strategy over scale.

That’s according to the latest analysis from Kaufman Hall, which reported 11 deals announced in Q2. Several large deals this quarter generated average seller size by revenue that significantly exceeded year-end averages dating back to 2017.

Two of the 11 deals were major mergers, but both were strategic in nature – in one case, to gain access to new tools, technologies and capital investment, and in the other, to support one of the partners’ efforts to reconfigure the system.

WHAT IS THE IMPACT

Deal counts in the quarter were below recent historical averages in Q2, indicating a slowdown in recent M&A growth seen since the COVID-19 pandemic. However, the average seller size was close to $1 billion – a 161% increase since 2017.

Due to the large average seller size, total transaction revenue for the quarter of $10.8 billion also remained close to historical levels despite fewer announced deals.

Three of the 11 deals involved religious-affiliated buyers, two involved college or university-affiliated buyers, and the remaining six involved other nonprofit health system buyers. For the first time since Kaufman Hall has been tracking data, there were no for-profit health system buyers in Q2, except for real estate-only deals, continuing the trend of low activity among for-profit entities.

With the reduced emphasis on scale, other trends have emerged. One is the pursuit of intellectual capital and new or complementary capabilities through strategic partnerships, often involving an innovative partnership model. Another is the focus of large regional or national systems on market reorganization and strategic realignment of their system portfolios. A third is the development of networks involving academic health systems and community hospital partners to maintain and expand access to care.

The acquisition of Ascension St. Vincent Hospitals and Health Care Facilities in central Alabama by UAB Health System continues another trend observed by Kaufman Hall: the growth of regional care networks centered on an academic health system.

The company believes partnerships with local health systems can help academic health systems reduce capacity constraints on their main campuses, as well as expand opportunities for residency programs, clinical research programs, and patient access to tertiary and quaternary services.

“But there is another important function of academic health systems that is often overlooked,” the analysts wrote. “Many serve as a safety net for their communities, providing access to care for populations that would otherwise be underserved.”

In announcing its planned acquisition of Ascension St. Vincent’s facilities — which have been partnered with UAB Health System since 2020 — UAB noted that while hospitals across the country are closing, the company remains committed to strengthening hospitals in its community.

The acquisition of Ascension St. Vincent’s facilities, which will be accompanied by investments in clinical services and infrastructure, “will ensure that the community maintains access to sustainable, high-quality health care” well into the future.

BIGGER TREND

Kaufman Hall said the pressure to transform health care systems is being met with competition from federal antitrust regulatory agencies, which have taken a more aggressive stance on mergers and acquisitions in the health care sector.

However, as the focus of deals shifts from scale to strategy, the value proposition of new partnership models becomes increasingly greater.

“The transformation of the current healthcare system is clear, and models are already taking shape that will enable this transformation and deliver greater value to patients and communities,” the analysts wrote.

Jeff Lagasse is the editor of Healthcare Finance News.
Email address: [email protected]
Healthcare Finance News is a publication of HIMSS Media.