Market Volatility Cools Hospital M&A Momentum in Q1

New analysis reveals that organizations are holding off on dealmaking amid an uncertain economic environment.

As the country attempts to adjust to economic and policy changes under the new administration, hospital M&A has nearly screeched to a halt.

The first quarter of the year featured just five deals, marking the fewest transaction in recent history and a major drop-off from the spiking levels of activity in 2024, according to a report by Kaufman Hall.

For comparison, 20 deals were announced during the first quarter of last year. In total, 2024 saw 72 transactions following steady year-over-year growth since dealmaking plummeted to 49 transactions during the height of the pandemic in 2021.

The third quarter of 2021 represented the previous low point for deals in recent history, when seven transactions were announced.

"The low number of M&A transactions involving hospitals and health systems mirrors global trends across industries," Anu Singh, managing director of Kaufman Hall, said in a statement. "Economic uncertainty around tariffs and healthcare policy has likely contributed to a relatively quiet quarter."

In addition to dealmaking in the first quarter being minimal in volume, it was also small in transaction size. The average size of the smaller party in the deals was $279.3 million, or around half of the average seller size of $559 million for 2024.

Among the five transactions, there were no mega-mergers, or deals in which the smaller party has annual revenues over $1 billion. The total transacted revenue of the transactions was just under $1.4 billion, less than half of the recent low of $3 billion from the first quarter of 2022.

Due to rising costs and other financial challenges stemming from the current economic landscape, organizations are moving away from mega-mergers and pursuing strategic partnerships that prioritize efficiency.

That has also caused more health systems to seek out joint ventures and innovative collaborations that come without the risks of consolidation. The report highlighted two such partnerships in the first quarter of this year: UNC Health and Duke Health creating a new children's health system in North Carolina, and Kootenai Health and MultiCare Health System announcing the development of a new medical campus.

What continues to drive a significant portion of hospital M&A deals is financial distress. Last year saw a record-breaking 30.6% of transactions driven by financial distress. Four of the five deals in the first quarter featured a financially distressed party, while three of the five involved a divestiture or portfolio realignment.

Kaufman Hall's National Hospital Flash Report for February found a 44.6% gap in operating margin between the 5th and 95th percentile hospitals. That divide is expected to generate more deals motivated by financial distress going forward.

Though analysts believe that organizations are still eager to make deals, whether they do will depend on if market factors eventually normalize.

"The uncertainty felt today is reminiscent of the uncertainty that surrounded healthcare organizations at the height of the Covid pandemic, when M&A activity also slumped," Kaufman Hall wrote. "The climb out of that slowdown showed that the appetite for M&A activity remains; revival of activity in 2025 will likely be dependent on a restoration of some certainty about the nation’s economic direction and the financial stability of the healthcare sector."