Financial Challenges Drove Healthcare Merger and Acquisition Activity

Healthcare merger and acquisition activity continues to rebound to pre-pandemic levels, with many transactions in the third quarter of 2023 driven by financial challenges, according to a Kaufman Hall report.

There were 18 transactions announced in Q3 2023, up from seven in Q3 2021 and ten in Q3 2022. Merger activity is edging closer to pre-pandemic numbers, when 18 transactions were announced in Q3 2018 and 25 were announced in Q3 2019.

The number of transactions announced in Q3 2023 fell from 20 in Q2 2023.

The average annual revenue of the seller or smaller party was $453 million in Q3 2023, which exceeded pre-pandemic figures. Between 2017 and 2019, the average size of the seller ranged from $272 million to $409 million. However, the average size of the seller dropped from the 2022 year-end average of $852 million.

There was only one mega-merger in the third quarter—a deal where the smaller party has annual revenues above $1 billion.

Total revenue generated by the mergers and acquisitions was $8.2 billion, up from $7.4 billion in Q3 2020 and $5.1 billion in Q3 2021, but down from the $13.3 billion generated in Q2 2023. The transacted revenue last quarter was driven by three mega-mergers, the report noted. After disregarding the mega-mergers from each quarter, the revenue in Q3 was $243 million, while that of Q2 was just $159 million.

In 14 of the 18 announced deals in Q3 2023, not-for-profit health systems were the acquiring or larger party, while the remaining four larger parties were for-profit systems. Half of the not-for-profit acquirers were academic/university-affiliated organizations.

The transactions where the acquirer was a for-profit system included three acquired organizations that were financially distressed. According to the report, 39 percent of announced transactions in Q3 2023 included a party that cited financial distress as a transaction driver or had publicly available information that alluded to financial challenges.

Hospitals and health systems have been experiencing significant financial pressure since 2022, when median operating margins were negative for the whole year. Margins have moved into the positives in 2023 but remain low.

Smaller and medium-sized health systems with annual revenues between $250 and $750 million often seek partners due to rising expenses. In recent quarters, health systems with revenues of $1 billion or more have also cited financial challenges as reasons behind mergers.

Some health systems participated in new transaction structures that allow them to maintain independence while partnering to improve patient care. For example, in Q3, UVA Health acquired a 5 percent ownership interest in Riverside Health System. Similarly, Novant Health acquired a 30 percent minority stake in South Carolina-based Conway Medical Center.

Increased regulatory scrutiny of healthcare transactions may impact merger and acquisition activity growth. The Federal Trade Commission (FTC) and the Department of Justice (DOJ) proposed new merger guidelines, and state attorneys general are receiving more authority to review proposed deals.