Hospital transactions lulled in 2019 as for-profit divestitures slowed and large deals stalled, according to a new report.
There were 85 hospital deals last year, which marked the second lowest total since 2009, Ponder & Co.'s data show. Hospital mergers and acquisitions were down 27% from 2018 and 17% from the trailing 10-year average.
As the number of financially struggling independent hospitals dwindle, larger and more stable health systems are discussing tie-ups. Those generally have a higher bar to clear, said Eb LeMaster, a managing director at Ponder & Co.
"Transaction completion rates for financially struggling independent hospitals is high. The business case for justifying a transaction between two healthy systems is more complex," he said. "There are good reasons to do it, but it is not as obvious as something like capital needs."
In the Midwest, Sanford Health nixed its deal to form an $11 billion system with UnityPoint Health. Wisconsin-based Gunderson Health System and Marshfield Clinic Health System scrapped their merger. Partners HealthCare ditched its plan to acquire Rhode Island health systems, dropping its bids to acquire Care New England as well as Lifespan. In Texas, Baylor, Scott & White Health and Memorial Hermann Health System also ended their talks to form a regional powerhouse before reaching a definitive agreement.
One contributing factor may be that not-for-profit systems have been jumping into letters of intent to combine quicker than their for-profit cohorts, LeMaster said. The CMS boosted hospital reimbursement by 3.2% in 2020 and Medicaid disproportionate share hospital payment reductions were delayed again, which may have diminished urgency, he said.
Community Health Systems, Tenet Healthcare Corp. and other investor-owned hospital system activity has cooled as systems integrate hospitals. Only 18 transactions involved a for-profit acquirer in 2019, which was the lowest amount over the past 10 years, Ponder & Co. found. There was an average of 30 deals over that span.
Deals involving hospitals or systems with $250 million to $750 million in revenue declined by nearly 50% from 2018 to 2019. Revenues of acquisition targets shrank 23% in 2019 compared to the previous five years, according to the report.
"Hospitals are being more deliberate and taking time on transactions," said Karl Henkel, a Ponder & Co. analyst.
As research continues to point to hospital consolidation inflating prices, new findings challenge a common argument that mergers improve quality of care. So-called synergies often don't live up to executives' expectations, studies show. State regulators are also limiting annual price increases as regional health systems combine, which could be impacting M&A talks.
More hospitals are exploring joint ventures, clinical affiliations, minority equity investments and other informal partnerships. Those can be a bridge to more concrete integration, but they might also supplant M&A or even deter it if things don't go well, LeMaster said. Still, many discussions are in the pipeline and talks picked up in the fourth quarter, he said.
While there is some cyclicity to M&A pace, 2019 might mark a new normal, LeMaster said.
"There was a huge uplift in terms of the number of for-profit divestitures from 2016 to 2018; I'm not saying it will not stop but it likely won't be that kind of pace," he said. "I don't see the sheer number of transactions to replace that."