Moody's Predicts 'Robust Pace' for Hospital M&A Through 2021

Median net patient revenue for not-for-profit health systems was $1 billion in fiscal 2020, nearly double the $568 million in 2010.

Hospital partnerships, affiliations, and mergers and acquisitions "will continue at a robust pace in the healthcare sector in 2021," extending a decade-long consolidation trend in both the not-for-profit and for-profit sectors, Moody's Investors Service said in a new report.

"Larger health systems will pursue M&A to increase market share through geographic and service line diversification," Moody's said in its April Healthcare Quarterly report. "As COVID-19 takes a toll on financial performance, smaller providers will look to partner to gain access to clinical, strategic, and financial resources and reduce labor, supply and information technology expenses."

The report noted that median net patient revenue for not-for-profit health systems was $1 billion in fiscal 2020,1 nearly double the $568 million in 2010.

Moody's credited the steady increase of revenues for not-for-profit health systems over the past decade to provider consolidation, because bigger systems have greater leverage with payers. In addition, larger systems offer better access to pricey clinical resources for complex money-making procedures.   

While Coronavirus Aid, Relief and Economic Security (CARES) Act money, Medicare accelerated payments and expense reductions have offset pandemic-related losses, Moody's said that relief "will be temporary as hospitals will need to repay Medicare for the payment advances while volumes will likely remain at lower-than-historical levels."

"Smaller systems may find it more difficult to repay the Medicare funds, given lower liquidity and less financial flexibility than larger health systems," Moody's said. "And partnerships provide an opportunity to lessen financial challenges, such as an increasingly more expensive workforce."

Moody's said M&A will allow larger health systems to diversify revenue streams, which will become more important with a weakening payer mix, particularly in areas where Medicare, Medicaid, and other government insurers are the dominant payers.

"An aging population will exacerbate the trend as an increasing number of older Americans shift to Medicare and, at least during the economic downturn, if people out of work move to Medicaid coverage," Moody's said. "Additionally, organic growth will be constrained by an increasing level of patient care moving to lower-cost, non-hospital settings, including those operated by nontraditional providers, which drives down potential reimbursement revenue."

Moody's also anticipates that independent physicians will affiliate with larger health systems offering financial incentives. "Physician burnout and the financial impact of the pandemic-related shutdown in elective services also stands to drive hospital/physician partnerships or acquisitions," Moody's said.

For-profits Flush with Cash

For-profit health systems are flush with cash thanks to CARES Act money and rapid cost reductions because of the pandemic, Moody's said, and that will push M&A activity in the for-profit sector for the next 12-to-18 months.

"Consolidation will be focused on enhancing services provided outside the hospital as consumers seek more access points and flexibility," Moody's said. "Flush with liquidity, for-profit hospitals will focus M&A efforts on building capabilities in non-hospital settings to meet consumer demand."

Some for-profit systems refused CARES Act funds or returned it, which Moody's said illustrates their continued financial health during the pandemic. "HCA Healthcare, Inc. (Ba1 stable), for example, returned its funds, but liquidity improved substantially in fiscal 2020," Moody's said.