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Analysis

'Unprecedented World' of Provider M&A Activity

By Jack O'Brien  
   January 11, 2019

Mergers between health systems are no longer made out of financial necessity but instead as a function of strategic vision, according to a new Kaufman Hall report.

Providers continued the trend of pursuing large-scale mergers throughout 2018 as leaders aim to ensure the longterm strategic viability of their respective organizations, according to a Kaufman Hall report released Thursday.

Last year, seven healthcare mergers involved sellers with more than $1 billion in net revenues, as providers seek partnerships that can expand geographic coverage or services offered in order to bolster their respective business models. 

The common assumption that sellers are primarily financially-distressed organizations has been disspelled, according to Anu Singh, managing director of Kaufman Hall, as M&A activity takes on a more strategic value.

He told HealthLeaders that this phenomenon has accelerated over the past decade, rising from zero healthcare mergers with target revenue over $1 billion in 2009, to eight such transactions in 2017. 

"Each year, we're seeing [a handful] of organizations that have more than $1 billion in revenue that end up being the smaller health system in a potential deal," Singh said. "That's not a unique fact to this year, but when you add that up and aggregate it from where it was and the fact that there wasn't a single transaction like that prior to 2010, that's a pretty big indication that we're in that unprecedented world."

"It's unprecedented to see that level of activity that consistently for that echelon of organizations that we're seeing right now." 

Singh said the biggest takeaway for health system CFOs is realizing this trend of organizations with limited risk of defaulting on credit entering into partnerships is another step in healthcare transformation. 

In 2018, the amount of transactions involving financially-distressed sellers dropped by one percent to 20%, while the average size in revenue for sellers has grown at a compound annual growth rate of 13.8% over the past decade.

Eyes on corporate disruptors and payers

As corporate disruptors like Amazon and Apple seek to gain a foothold in the healthcare industry, some see the strategic goal for providers as achieving larger scale to fend off multibillion dollar competitors in the coming years. 

However, Singh said that industry disruptors seem to be succeeding in selective areas that play to existing strengths, like medical devices or prescription delivery, while not actively working to move into the healthcare delivery space. This should allow health systems time to pursue potential mergers and partnerships for scale while also understanding how to better solidify core business operations and appeal to consumers. 

Similarly, Singh does not believe that merger activity among providers, whether between large-scale systems or community hospitals forming regional systems, will result in an escalating arms race with payer organizations.

He cited the limited options for further consolidation among payers compared to the far more fragmented provider landscape across the country as reasons why the vertical integrations will not foster greater competition between the two sides. Singh added that collaboration is likely to occur in the future as both sides navigate changes to reimbursement rates and tightening margins. 

Additional highlights from Kaufman Hall:

  • Hospitals should still expect challenges from corporate disruptors to their outpatient business.

  • The report also acknowledges the decreasing relevance of tax status as partnerships are fostered among for-profit and not-for-profit systems.

  • Not-for-profit systems led the way in 2018, serving as the acquirer in 75% of transactions.

  • Different markets are experiencing different rates of M&A activity.

  • While 16 states had no mergers in 2018, Texas and Florida recorded eight and seven deals, respectively.

  • The Lone Star state also topped the nation in total transaction revenue in 2018 with $6.8 billion.

  • Geographic lines are no longer standing in the way of future consolidation efforts, as health systems "seek to establish a broader regional presence."

“It's unprecedented to see that level of activity that consistently for that echelon of organizations that we're seeing right now.”

Jack O'Brien is the finance editor at HealthLeaders. 


KEY TAKEAWAYS

M&A activity in 2018 marked another step in the transformational journey of many health systems seeking strategic partners. 

Increasing scale and focusing on cementing core business operations are the primary objectives for providers as corporate disruptors enter healthcare.

A collaboration with payers, rather than an arms race to consolidate, could occur in the future.


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