Healthcare M&A Activity Slows, But Deal Value Increases

Healthcare merger and acquisition (M&A) activity is hitting a new stride: fewer, but larger deals.

That is according to the findings from consulting firm Kaufman Hall’s M&A Quarterly Activity Report: Q3 2021. The report showed just seven healthcare M&A deals announced in the third quarter of 2021, down from 19 announced deals during the third quarter of 2020 and 71 announced deals during the third quarter of 2019.

But while hospitals and health systems are pursuing fewer M&A deals, the value of announced deals remains high. Total transacted revenue for the quarter was $5.2 billion, bringing combined M&A deal revenue to $22.4 billion, the report found. The values are in line with previous years when total transacted revenue was about $24.3 billion in 2020 and 2019, respectively.

Average seller size, however, did increase in the third quarter of 2021. For example, Utah-based Intermountain Healthcare announced during the quarter that it intends to merge with SCL Health in Colorado to form an $11 billion health system with 33 hospitals across g Colorado, Idaho, Kansas, Montana, Nevada, and Utah.

Another significant deal in the third quarter involved Edward-Elmhurst Health and NorthShore University HealthSystem, both headquartered in Illinois. The health systems have announced plans to merge to create a combined health system of more than $4 billion. If finalized, the organization would notably operate 9 hospitals in the Chicago area and create the second largest physician network in Illinois.

Overall, average seller size rose to $659 million, more than double the average of $329 million over the past six years.

This trend—high average seller size—is likely to continue for the rest of the year as larger hospitals and health systems seek new partners to recover from the devastating impact of the COVID-19 pandemic, analysts at Kaufman Hall reported.

Additionally, the pandemic has spurred more non-traditional healthcare M&A deals, they said.

“In the months before the COVID-19 pandemic struck, we commented on significant levels of activity that were occurring outside the realm of traditional hospital and health system mergers,” they wrote in the report.

“Our M&A activity report for Q3 2019, for example, described an emerging trend in payer-provider partnerships, and our year-end report for 2019 identified a diverse range of partnerships between health systems, payers, physician practices, and digital health companies as a major trend for the year. This trend appears to be accelerating in the wake of the COVID-19 pandemic.”

Hospitals and health systems are looking for partners who are not necessarily their peers in order to provide new care delivery models, such as telehealth and hospital-at-home programs. The shortcomings of fee-for-service, which were highlighted during the pandemic, have also pushed more provider organizations to partner with payers on value-based care and reimbursement models.

Other issues impacting this trend includes health equity, which requires creative partnerships to reach underserved populations, analysts stated.

In some cases, organizations that are partnering to address one or more of these issues are normally competitors in some capacity.

“We use the term ‘coopetition’ to describe organizations that are both potential competitors and collaborators in partnerships to improve access to care. Health systems stand to benefit immensely from partnerships with organizations that have already developed expertise and data in specialized service areas or new care delivery models,” analysts wrote.

Looking forward, Kaufman Hall expects healthcare M&A activity to continue to respond to the ongoing COVID-19 pandemic as hospitals and health systems look to recover from operational and financial challenges.

“The path toward normalization will be longer, but we see continued activity in reframing strategies and partnerships that will enable health systems to focus on their own core strengths—which have been so much on display over the past 18 months—while expanding the services they offer to their communities,” they concluded.