Hospital Merger and Acquisition Activity Indicates Strategic Shifts

Healthcare leaders are looking for growth opportunities that will enable the provision of care through a broader array of services and business segments.

[Editor’s Note: This article was contributed by Anu Singh. Singh is a Managing Director with Kaufman, Hall & Associates, LLC, and a leader of the firm’s Mergers and Acquisitions practice.]

Fundamental shifts are occurring in hospital and health system partnership transactions on three fronts: the size of entities pursuing transactions, the types of transactions being pursued, and the underlying drivers that are motivating organizations to take action.

The number of transactions among hospitals and health systems has been on the rise, increasing 55% from 66 in 2010 to 102 in 20161. As a result, the industry is seeing a whole new level of activity year-to-year than it has in decades past. There have been some fluctuations. In 2016, for example, the number of transactions dipped to 102 following a year of significant growth that reached a high of 112 in 2015. The overall trend, however, has been an upward trajectory that is expected to continue for the foreseeable future.

Rising Participation Among Larger Organizations

In looking at the types of organizations involved in transactions historically, a large number involved smaller community hospitals that faced declining resources and increased investment needs. Such organizations pursued partnerships out of clear financial need. While there continue to be transactions involving smaller entities in need of such investment, the last several years have seen an uptick in transactions among larger, more financially sound organizations. One indicator of this is an increase in transactions involving organizations with high credit ratings. Between 2012 and 2015, the number of target organizations with a credit rating equivalent to A- or above rose from just one to 13.

Revenue is another indicator. There were a mere handful of transactions involving not-for-profit health systems with revenue of $1 billion or more in decades past. Since about 2009, however, there have been multiple transactions involving $1 billion+ organizations each year. In 2016, four transactions involved the acquisitions of organizations with annual revenues of more than $1 billion. The largest deal announced last year was the merger of Englewood, Colo.-based Catholic Health Initiatives ($14.5 billion in revenue) and San Francisco-based Dignity Health ($13.3 billion in revenue). If consummated, the merger would create the nation’s largest not-for-profit health system serving nearly a quarter of the U.S. population.

Greater variety in the types of transactions that are pursued also is evident, with more organizations seeking non-traditional partnerships that don’t involve the sale of one entity to another, but rather a sharing of assets and resources. Examples of these forms of partnerships include joint ventures, joint operating agreements, management services agreements, and purchasing and/or “best practice” collaboratives. Such arrangements often are more appealing to financially strong, large, or like-sized organizations that are looking for economic alignment, shared governance, or an optimized operating and management model, as opposed to an infusion of cash or capital commitments.

Shifting Toward Strategic Partnerships

While transactions among large organizations still represent a relatively small number of overall hospital and health partnership transactions, the fact that they are increasing signals broader changes that are indicative of where the industry is headed. Several disruptive forces are affecting healthcare, including rising competition from non-traditional healthcare providers, the shift toward population health management, and the need to demonstrate value and increase access for healthcare consumers under a value-based business model. Instead of pursuing partnerships out of financial need, healthcare leaders are looking for growth opportunities that will enable the provision of care through a broader array of services and business segments over a larger geographic area as part of highly coordinated networks.

Hospital and health system leaders are seeking to build and invest in new capabilities, expertise, and resources in order to boost efficiencies and change how care is delivered. Many organizations are looking to support operational and clinical performance improvements—such as reducing unnecessary variation in care—through enhanced data collection and analysis. Partnerships also offer the opportunity to build scale in terms of managed patient populations, which allows organizations to increase network essentiality and more effectively distribute risk associated with value-based payment arrangements.

Strategic cost management is a key focus of nearly every partnership transaction in healthcare today. While once a strategic initiative for many, today, cost efficiency is an operational imperative that is critical to execute given slower revenue growth and increasing price sensitivity from patients, employers, and payers. As larger organizations come together, significant opportunities often exist to build efficiencies and reduce redundancies in services and facilities.

Looking Ahead

The upward trajectory of hospital and health system partnerships—and increased creativity in partnership models—are likely to continue as industry transformation progresses. As the pool of potential partners narrows, more transactions will occur between varied types of organizations, such as religious and non-religious, for-profit and non-profit, and academic and non-academic organizations. Partnerships between acute, post-acute, and non-acute providers also will rise, as legacy hospitals and health systems expand their continuum of care.

The Federal Trade Commission and the Department of Justice have demonstrated increasing scrutiny of hospital and health system transactions, but that is unlikely to curtail the level of partnership activity over the long term. Instead, it may cause healthcare leaders to shift their focus to organizations beyond their existing market area to avoid competitive concerns from the federal agencies.

  1. All transactions data according to analyses by Kaufman, Hall & Associates, LLC

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