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Financial Distress Continues to Drive Divestitures, M&A

Analysis  |  By Jay Asser  
   January 20, 2025

The industry is seeing new highs in areas of dealmaking that illustrate recovery is ongoing.

Although hospitals' and health systems' margins have largely stabilized, dealmaking trends reveal that many organizations are still dealing with financial challenges.

Health systems are divesting at a record rate due to financial distress, forcing larger organizations to increasingly seek out partnerships, according to a report from Kaufman Hall.

The analysis found that 45 of the 72 announced transactions in 2024 (62.5%) involved a divestiture, more than doubling the mark of 31.1% for 2023 to set a new high for the industry.

Nearly a third of the deals (30.6%) featured a financially distressed party, topping the previous record of 27.7% from 2023.

It isn't just smaller hospitals that are making up these types of transactions either. The average seller size by annual revenue involved in financially distressed deals last year was $401 million, which nearly doubled the high of $219 million from 2022. The total transacted revenue for those moves was $8.8 billion, compared to $2.3 billion for the previous year.

Meanwhile, mega-mergers are evolving to include more deals between a larger organization and a party of significantly lesser size, the report highlighted. Examples of this in 2024 included Risant Health's acquisition of Cone Health, HATCo's planned acquisition of Summa Health, Nuvance Health's planned merger with Northwell Health, and Sanford Health's merger with Marshfield Clinic Health System.

“While these may not all involve financially distressed organizations, it does suggest that large organizations are not immune to financial and operational challenges—a trend to monitor in 2025," Anu Singh, managing director in the Mergers & Acquisitions Practice at Kaufman Hall, said in a statement.

A major focus of health systems pursuing divestitures currently is market realignment. In 2024, a record 62.5% of transactions featured market reorganization, which is allowing regional health systems capable of taking advantage of these sales to achieve growth.

Analysts also noted that transformative partnership models, such as the ones led by General Catalyst's HATCo and Kaiser Permanente's Risant Health, should have a greater presence going forward as health systems search for innovative ways to tackle industry challenges.

Increased M&A activity in general is expected this year due to a potentially loosened regulatory climate. A recent report by PwC forecasted that a pro-business stance by the new presidential administration could cool regulatory pressure, clearing the way for more deals to be pursued and completed.

Jay Asser is the CEO editor for HealthLeaders. 


KEY TAKEAWAYS

A report by Kaufman Hall found that 62.5% of announced transaction in 2024 were divestitures, while 30.6% involved a financially distressed organization, with both figures setting new records.

Larger organizations are increasingly pursuing mergers with smaller parties, reflecting that even sizable health systems are being forced to maneuver to alleviate financial pressures.

More transformative partnerships outside of the typical merger or acquisition are anticipated to emerge in the coming years.


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