Financial Distress Drove 2023 Merger and Acquisition Activity

Healthcare merger and acquisition activity increased in 2023, with many transactions driven by financial distress, a Kaufman Hall report revealed.

In 2022, merger and acquisition activity rebounded from the COVID-19 pandemic, with 53 transactions occurring. This number increased in 2023 to 65 announced transactions totaling $38.4 billion. In the last quarter of 2023 alone, 16 transactions totaled $10.4 billion. The average size of the smaller party was $647 million.

Among all of the transactions in 2023, the revenue of the smaller party was less than $100 million for 19 deals, between $100 million and $500 million for 32 deals, and between $500 million and $1 billion for six transactions. Eight deals were considered mega-mergers, with the smaller party’s average revenue over $1 billion. The average size of the smaller party in 2023 was $591 million, down from $619 million in 2021.

Mega-mergers accounted for 12 percent of all transactions in 2023 compared to 15 percent in 2022.

More hospitals and health systems merged in 2023 due to financial distress, the report found. Operating margins remained negative throughout 2022, fueling merger and acquisition activity the following year.

Financial distress was cited as a factor or evident in 28 percent of announced transactions in 2023, marking the highest percentage since the data has been tracked. In contrast, 15 percent of transactions occurred due to financial distress in 2022.

Despite the increase in financial distress as a driving factor behind deals, the share of transactions in which the smaller party had a credit rating of A- or higher has remained consistent. This indicates that creditworthy organizations have also recognized the need for strategic partners, the report stated.

Although hospital margins emerged from the negatives in 2023, many organizations are still struggling financially, and merging with other entities may provide some relief.

“These trends underscore the need for organizations to, whenever possible, attempt to work from a position of strength when seeking partnership alternatives before financial distress impacts a hospital or health system’s flexibility,” the report stated. “Doing so allows community hospitals the opportunity to secure key services and other commitments to ensure that their community continues to have access to the appropriate level of care and that the hospital’s legacy survives into the future.”

Researchers noted certain market trends in 2023, including portfolio realignment among for-profit and not-for-profit health systems, a push by health systems to organize regional markets, and academic health systems developing regional networks with community hospitals.

In 2024, they expect to see continued focus on regional market development, persistent influence of financial pressures, movement among previously stable independent community health systems, and new partnership models.