Hospital Merger and Acquisition Activity Withstands COVID-19 Slump

While COVID-19 has resulted in substantial revenue losses for healthcare providers, the pandemic has had less of a dramatic impact on hospital merger and acquisition activity. In fact, the crisis has demonstrated the benefits of potential deals, according to healthcare consulting firm Kaufman Hall.

Hospitals and health systems announced 14 transactions during the second quarter of 2020, the latest M&A Quarterly Report showed. The volume of transactions represented a decrease compared to the prior quarter in which 29 transactions were announced, but it was not a significant reduction year-over-year, the report found. There were 19 merger and acquisition transactions during the second quarter of 2019.

Additionally, two “transformational transactions” were announced in June, which resulted in the quarter seeing one of the highest values for average size of seller by revenue ever observed by Kaufman Hall.

In June 2020, Steward Health Care acquired a group of affiliated physicians, while Advocate Aurora Health also announced a proposed merger with Beaumont Health. In light of these transactions, the average size of seller by revenue increased to over $800 million during the second quarter of 2020. The historic high recorded by Kaufman Hall was $409 million in 2019.

Total transacted revenue for the quarter was also high, the report showed, at just over $12 billion despite a relative smaller number of transactions.

The crisis is leading healthcare leaders to assess current care delivery models and reimagine how health systems could be better configured to meet needs the pandemic has exposed, Anu Singh, managing director of Kaufman Hall, explained in an email to RevCycleIntelligence.

Hospital financial performance hit a low in April because of the COVID-19 pandemic. Data from Kaufman Hall showed hospital operating margins dipping by 282 percent compared to the previous year, resulting in a median operating margin of -29 percent.

The hospital financial outlook started to look up in May, with funding from the CARES Act helping to push the median operating margin to 4 percent, Kaufman Hall recently reported. However, hospitals and health systems still performed well below 2019 levels and budgets that month as the organizations continued to see lower volume and revenue levels coupled with higher-than-normal expenses.

Negative hospital financial performance has impacted hospital merger and acquisition activity, but not as dramatically as industry experts thought.

“If anything, the pandemic has demonstrated advantages of scale, coordination, and innovation that are likely to strengthen the strategic rationale for future partnerships,” Kaufman Hall stated.

Larger health systems appear to be absorbing the financial hit from the pandemic, experts have found. The organizations had larger cash reserves, greater access to capital and human resources, and other deployable resources to quickly pivot operations for COVID-19.

Moving beyond COVID-19, experts at Kaufman Hall anticipate hospital merger and acquisition activity to remain strong.

The pandemic did not alter the underlying strategic rationale for hospital merger and acquisition deals, they explained. Conversely, it may have strengthened the rationale for certain partnerships like the one proposed between Advocate Aurora Health and Beaumont Health, which stated that they had started merger talks before COVID-19 hit the US.

Additionally, the pandemic is prompting organizations like Steward Health Care to reexamine their care delivery models and forge a new path for how their health systems are organized to meet the needs of patients after a crisis, the experts stated.

“We believe the COVID-19 crisis has only strengthened the healthcare industry’s imperative for transformation,” the report concluded. “We anticipate that we will see more discussions that began pre-pandemic moving to definitive agreements or closure in the remaining quarters of the year. And we look for a resumption, or even an acceleration, in the pace of new transactions as hospitals and health systems reposition themselves for the post-pandemic future.”