Hospital M&A volume reaches decade-plus low

The number of hospital merger and acquisition transactions reached a new low in 2022, although more deals are expected this year.

Only 55 transactions reached the letter of intent or definitive agreement stages, the lowest number since 2009, the year financial advisory group Ponder & Co. started tracking hospital M&A activity. The 2022 tally marks the fifth consecutive decline in annual volume, according to Ponder & Co. data contained in the Modern Healthcare Premium Data Center.

There are fewer financially distressed hospitals to acquire after years of consolidation, and potential buyers are being more careful as they manage higher labor and supply costs, declines in investment income, heightened regulatory scrutiny and Medicare reimbursement cuts. But amid that financial pressure, midsized and large systems will still look to sell hospitals in smaller markets, said Jake Aygun, director of the M&A group at Ponder & Co.

“Potential acquirers are facing their own challenges and are therefore much more judicious and careful as they consider integrating challenged assets into their system,” Aygun said. “But there is a healthy backlog of other deals that are already at the letter-of-intent stage and a lot more behind-the-scenes discussions happening, which could mean the trend line breaks back in the opposite direction.”

While the number of hospital transactions declined, the value of the deals from 2022 nearly doubled the previous annual record for the past decade, according to Ponder & Co. data released Tuesday. Financially healthy regional systems are seeking similarly situated merger partners—often in non-overlapping markets—as they look to spread rising labor and supply costs over larger organizations, improve their standings in the bond market and boost their bargaining leverage with commercial insurers.

For instance, Advocate Aurora Health, jointly headquartered in Downers Grove, Illinois, and Milwaukee, and Atrium Health of Charlotte, North Carolina completed a merger last month to create Advocate Health, a $27 billion health system with 67 hospitals in six states.

Some regional systems pursuing mergers have renegotiated their deals seeking more favorable terms, said Jordan Shields, a partner at Juniper Advisory, an M&A advisory firm focused on nonprofit healthcare transactions. “Not-for-profit hospitals have gotten a little bit overreliant on investment returns, leading to some renegotiation. But the midsize and large systems remain really growth-oriented,” he said. “I believe the number of closed transactions in the first half of 2023 are going to be up significantly.”

Among those systems is Evansville, Indiana-based Deaconess Health System and its affiliate Deaconess Illinois, which acquired four southern Illinois hospitals from Quorum Health, a for-profit chain based in Brentwood, Tennessee. Another is Carle Health, a five-hospital system based in Urbana, Illinois, that is seeking to acquire three Illinois hospitals from Des Moines, Iowa-based UnityPoint Health, Shields said.

While the number of deals may rebound this year, transaction volume isn’t expected to return to the 120 range seen in 2017 and 2018.

Hospital merger and acquisition activity is not what it was like in the recent past because of a more aggressive regulatory environment, especially at the state level, said Neil Olderman, a partner at the law firm Faegre Drinker Biddle & Reath. For example, Minnesota Attorney General Keith Ellison (D) is holding public meetings about the proposed $14 billion merger between Sioux Falls, South Dakota-based Sanford Health and Minneapolis-based Fairview Health Services.

In addition, many prospective targets that were financially healthy suffered during the COVID-19 pandemic, Olderman said. That, in part, has led to more joint ventures and strategic partnerships rather than outright acquisitions, he said. “Many deals have been terminated during the diligence phase before definitive documents were signed, where before there was more of an appetite to push ahead,” he said. “Now we see a trend toward finding a more perfect fit.”