Healthcare M&A activity signals shaky financial recovery

Shaky financial outlook for hospitals

In a separate report, Kaufman Hall also highlighted financial troubles for hospitals and health systems.

The most recent "National Hospital Flash Report" analyzed data on more than 1,300 hospitals nationwide in November 2024. The report revealed a decline in patient volumes across emergency department and outpatient visits, among other volume metrics. The volume metric with the largest month-over-month decline at minus 8% was operating room minutes per calendar day, followed by adjusted discharges per calendar day and observation patient days as a percentage of patient days at minus 4%, respectively.

Despite lower patient volumes overall, expenses remained high, with overall increases across hospital expenses, except drugs and supplies. Workforce challenges also persisted, with higher labor costs in November 2024 compared to the previous month.

Overall, the Kaufman Hall calendar-year-to-date operating margin index reached 4.6% in November 2024, down slightly from 4.7% in October 2024. The operating margin index has hovered at about 4.6% over the course of 2024, with the exception of last January, when it reached a high of 5.2%.

"The data indicate that hospitals and health systems may have better opportunities to plan their expenses," Erik Swanson, senior vice president and data and analytics group leader with Kaufman Hall, said in the statement. "Using predictive analytics and modeling could help organizations optimize their financial planning processes."

What happened to healthcare megamergers?

Megamergers -- transactions in which the seller, or smaller party, has annual revenues of over $1 billion -- drove healthcare M&A activity at one point. In fact, large hospital mergers accounted for most announced transactions in 2022, as healthcare M&A activity regained momentum after the COVID-19 pandemic.

Kaufman Hall previously reported that the uptick in megamergers in 2022 signaled a new phase of healthcare M&A activity. This phase involved larger organizations seeking strategic partners for "transformative impact through the addition of new capabilities, enhanced intellectual capital, and access to new markets or services."

Megamergers are still significant, according to newer data. However, there seems to be a shift to mergers between larger and smaller hospitals and health systems, albeit the smaller party is growing significantly in size. Some examples from 2024 include Nuvance Health's planned merger with Northwell Health, Summa Health's planned acquisition by HATCo, Cone Health's acquisition by Risant Health and Marshfield Clinic Health System's merger with Sanford Health.

Kaufman Hall said these announced transactions "suggest that financial and operational challenges are moving up the scale, prompting larger organizations to seek a partner." Some announced transactions, like Risant Health's bid on Cone Health, also signify the trend toward "transformative new partnership models." Kaiser Permanente formed Risant Health in 2023 to unite like-minded organizations to advance value-based care. The company also acquired Geisinger Health in 2023.

HATCo's planned acquisition of Summa Health also points to a new partnership model. HATCo, a subsidiary of General Catalyst, aims "to acquire and operate a health system for the long term where we can demonstrate the blueprint of this transformation for the rest of the industry."

Kaufman Hall expects similar partnership models to be announced in 2025. Additionally, the firm expects continued portfolio and market realignment, changes to the regulatory environment post-election and more strategic transactions versus deals for scale's sake.

Jacqueline LaPointe is a graduate of Brandeis University and King's College London. She has been writing about healthcare finance and revenue cycle management since 2016.