Hospital acquisitions are expected to increase in the year's second half, fueled by improving finances at many large health systems.
Last week, Universal Health Systems raised its 2024 guidance after rising inpatient and surgery admissions boosted the King of Prussia, Pennsylvania-based for-profit provider's operating income. Also, the 70-hospital Community Health Systems said its second-quarter surgery volumes continue to grow. And Indianapolis-based IU Health reported a 4% increase in inpatient volume through the first six months of the year.
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While not all hospitals and health systems are experiencing the same increase in admissions, the recent financial metrics for several large systems bode well for the broader hospital industry, merger and acquisition advisers said. Those systems are expected to use the extra cash to fund deals.
“In the second half of the year, we are seeing increased profitability for more of the larger health systems,” said Ashraf Shehata, a partner at accounting firm KPMG. “That will likely move deal activity up.”
There were just 11 announced hospital transactions in the second quarter, down from 20 in the first quarter, according to data from consulting firm Kaufman Hall. For the year as a whole, deal volume is expected to mirror last year's tally of 65 announced transactions, advisers said.
Industry dynamics are much changed since hospital deals reached a high of 117 in 2017 — there are fewer small hospitals and health systems that could be potential targets and states and federal regulators have ramped up oversight. Nevertheless, there are opportunities for academic medical centers to expand and for large systems to restructure, driving a steady flow of mergers and acquisitions, experts said.
Academic systems grow
Academic health systems will continue to add community hospitals, seeking to expand their networks in their respective states and beyond, advisers said. The systems, which typically have the benefit of a streamlined regulatory review process and access to capital, will look to expand their brand to other markets.
“Academic medical centers will be aggressive,” said Neil Olderman, a healthcare attorney at law firm Faegre Drinker Biddle & Reath. “The capabilities they bring with research, clinical trials and primary care integration would give them a leg up in certain markets, especially in value-based care.”
Academic systems already have been active acquirers this year.
St. Louis-based Ascension signed an agreement in June to sell five central Alabama hospitals to the University of Alabama at Birmingham Health System Authority. UCSF Health and Chicago-based CommonSpirit Health on Thursday finalized an acquisition agreement involving two CommonSpirit hospitals in San Francisco. In the southern part of the state, Orange-based UCI Health in March acquired four Dallas-based Tenet Healthcare Corp. hospitals. Also, the merger between Philadelphia-based Jefferson Health and Lehigh Valley Health Network closed Thursday.
Large systems restructure
Large health systems including Ascension, CommonSpirit, Community Health Systems and Steward Health Care continue to shed hospitals in certain markets.
Ascension announced plans in July to sell nine Illinois hospitals to Prime Healthcare, a for-profit system based in Los Angeles. The Catholic health system also sold three Michigan hospitals to MyMichigan Health in August and is planning a $10.5 billion deal with Detroit-based Henry Ford Health, which would take over eight Ascension Michigan hospitals.
Franklin, Tennessee-based Community Health Systems said in July it plans to sell three Pennsylvania hospitals to Woodbridge Healthcare, a newly formed nonprofit based in New Hope, Pennsylvania, which acquires hospitals and provides them with capital.
Meanwhile, Steward, the Dallas-based, for-profit hospital chain that sought Chapter 11 bankruptcy protection in May, seeks to sell its entire hospital network and physician group. But Steward has delayed the sale proceedings as it hopes for more bidders.
“A lot of the national systems have been looking at system realignment divestitures and exiting select markets versus looking aggressively at individual hospital additions,” said Jordan Shields, a partner at Juniper Advisory, a nonprofit hospital M&A advisory firm.
Providers eye election, new oversight laws
The looming presidential election isn’t expected to significantly impact deal-making, experts said.
However, new state laws ramping up oversight of healthcare transactions are deterring transactions. More frequently, health systems have opted to look out of state for merger partners, where the FTC has been less willing to intervene compared with in-state deals.
For instance, Risant Health, the nonprofit entity created by Oakland, California-based Kaiser Permanente, signed a definitive agreement in June to acquire North Carolina's Cone Health. In July, Sioux Falls, South Dakota-based Sanford Health and Marshfield Clinic Health System in Wisconsin announced plans to combine.
“We are seeing the next phase of consolidation,” said Brian Platton, a healthcare attorney at Holland & Knight who advises hospitals and health systems. “The big are going to get bigger because of cross-market deals that don’t face the resistance of the Federal Trade Commission and offer strategic benefit through complementary capabilities and reputations.”
