Despite overall hospital margins improving, many health systems remain in need of a lifeline.
As more hospitals feel the constraints of financial pressures, they're turning to dealmaking to alleviate costs.
Health system mergers and acquisitions are continuing to trend toward pre-pandemic levels, but the volume of transactions doesn't necessarily indicate improved financial health. Rather, several of the recent deals have been driven by financial distress, as well as issues sustaining higher occupancy levels, according to a report by Kaufman Hall.
Eighteen transactions were announced in the third quarter, easily clearing the 10 deals over the same period in 2022 and the seven deals in Q3 2021. Of the 18 transactions from July through September of this year, seven involved a hospital or health system that cited financial distress as a driving factor for the deal, Kaufman Hall stated.
While hospitals as a whole are seeing margins stabilize the further back the pandemic is in the rearview mirror, that doesn't mean every facility is enjoying the same financial relief. Kaufman Hall's latest National Hospital Flash Report showed the median year-to-date operating margin index increasing from 0.9% in July to 1.1% in August, with net operating revenue increasing 8% month-over-month and gross operating revenue rising by 9%.
However, as Kaufman Hall's report over the summer noted, the gap between performing and struggling hospitals has widened, creating a haves and have-nots dichotomy. That divide is creating a more robust environment for M&A, with health systems in need of a lifeline seeking out partners with increased financial flexibility.
Kaufman Hall's M&A report revealed that only one of the transactions in the third quarter was considered a "mega merger," or a deal in which the smaller party has annual revenues above $1 billion. Total transacted revenue was $8.2 billion, which was down significantly from Q2's figure of $13.3 billion, but the drop-off was due to the second quarter having three mega mergers announced.
"When removing the mega mergers from each quarter, the average revenue in Q3 was actually significantly higher than that of Q2, at $243 million and $159 million respectively, demonstrating the significant uptick in activity in sizeable independent hospitals seeking out partnerships with larger organizations," the report said.
Fourteen of the 18 transactions in Q3 featured nonprofit acquirers, with half of those being academic or university-affiliated health systems. While many health systems have seen patient volume slowly creep back up to pre-pandemic levels, academic health systems are experiencing higher occupancy levels, with a recent Kaufman Hall report showing a median inpatient occupancy rate of 70% at academic health centers, compared to 53% at acute-care hospitals.
"Aligning an academic health system with a community-based health system provides the opportunity to relieve some of the occupancy pressures at the academic flagship hospital by utilizing available space in high-quality community hospitals to treat lower acuity patients," the report stated.
"An academic/community health system pairing also offers expanded opportunities for residency programs, clinical research trials, and patient access to tertiary and quaternary services."
Looking forward, CEOs should be prepared for increased scrutiny on transactions with new proposed merger guidelines issued by the Federal Trade Commission and the Department of Justice, Kaufman Hall warned.
However, hospitals recently secured a major win against regulatory requirements for dealmaking when a U.S. district judge ruled in favor of LCMC Health's purchase of three Tulane University hospitals from HCA Healthcare. The ruling granted the health system's request for a summary judgement that the transaction was exempt from federal antitrust laws due to Louisiana's issuance of a state certificate of public advantage (COPA). The FTC has lobbied against COPAs, which are currently present in 19 states.
Jay Asser is the contributing editor for strategy at HealthLeaders.
Hospital and health system M&A continues to trend back to pre-pandemic levels, with Kaufman Hall's latest report revealing 18 transactions were announced in the third quarter.
However, seven of those deals involved a hospital or health system that cited financial distress as motivation for the deal, highlighting the divide between performing and struggling facilities.
Academic health systems were involved in seven of the third-quarter transactions as they deal with higher occupancy rates.