The number of hospital transactions hit its lowest mark in nearly a decade in the first quarter of 2019, indicating that providers may be taking a more deliberate approach to dealmaking, according to a new white paper.
Fourteen deals were announced in the first quarter, the fewest in any quarter since the fourth quarter of 2009, Ponder & Co. said in a new report. It was the fourth consecutive quarter in which hospital M&A lagged the rolling annual quarterly average. The median target hospital was more than 40% smaller than that of 2018, Ponder's data shows.
The frenetic sell-off by Community Health Systems, Tenet Healthcare Corp. and other investor-owned hospital systems has cooled. Systems are digesting and integrating acquisitions. Declining inpatient utilization has quelled interest in small community hospitals. Fewer low-performing targets remain, allowing those that do to be more selective, said Eb LeMaster, a managing director at Ponder & Co.
"The pace may well continue to be steady but it's a pace that may be slower than what we have seen in 2015, 2016, 2017 and 2018," LeMaster said.
Still, the drivers of healthcare consolidation have not changed. Hospitals feel the pressure to grow faster than expense inflation and combat declining reimbursement. They also need to keep up with technology, capital expenses and value-based payment models, according to the paper.
If informal discussions are any indication, merger and acquisition interest has not waned, LeMaster said. But systems need to find a symbiotic alignment, not simply a takeover, he said.
"We see a number of larger health system clients interested in healthy small- to medium-sized systems asking how they can get together without selling or a change in control," LeMaster said.
New challengers are also spurring these discussions. Combinations like CVS Health and Aetna are so potentially disruptive and against the grain that people are spending a lot of time trying to figure them out, said Dr. Robert Galvin, CEO of Equity Healthcare.
"There has to be stress on hospitals and hospital volumes," Galvin said Monday during a webinar coordinated by Catalyst for Payment Reform.
As hospitals' high-profit service lines are threatened, they may mark up services that no one else is providing, said Leemore Dafny, a professor at Harvard Business School.
"That makes me nervous," she said during the webinar. "Cross-subsidization could rear its ugly head here too."
Ponder expects more for-profit divestitures as these systems reposition, but at a slower pace with less urgency. The paper noted potential asset sales involving LifePoint Health's merger with RCCH HealthCare Partners as private-equity owners review the portfolio.
Venture capital funding, including private equity and corporate venture capital investment into digital healthcare companies, in the first quarter reached $2 billion in 149 deals compared with $1.4 billion in 142 deals in the fourth quarter of last year, according to a new report from Mercom Capital Group.
Significant swings in Medicare reimbursement, such as the ongoing battle over site-neutral payments, could up the urgency and M&A pace, LeMaster noted.
Although the transition has generally been slow to non-existent thus far, not-for-profit providers will look to operate more like systems rather than confederations, which will likely result in divestitures, according to the paper.
Roadblocks still exist, especially as they relate to closing facilities or consolidating service lines. Providers have run into community backlash when the top employers in their respective markets cut jobs.
Not-for-profit systems may try to follow for-profits' example. Optum for instance, a division of UnitedHealth Group that has acquired surgery centers and physician groups, has optimized its back-office functions related to scheduling and bill pay, Galvin said.
Physicians, who have been waiting decades for a better model, are generally happier, he said. This could add more pressure on systems that have not matched that progress.