Health system megamergers continue to push deal activity to near-historic levels, evidenced by the fact that the amount of revenue tied up in such deals was nearly four times higher in the second quarter of 2019 compared with the prior-year period.
That's according to Kaufman Hall's latest healthcare M&A report, which tallied $11.3 billion in total transacted revenue in the recently ended quarter. That also approaches 2017's historically high figure of $12.6 billion in the second quarter, the report said.
Despite the eye-popping revenue figures, the number of hospital and health system transactions—19—wasn't far from the 21 transactions announced in the prior-year period. The 46 transactions announced so far this year closely track the 50 announced at the halfway point of 2018, Kaufman Hall found.
It's the continuation of a trend that surfaced around 2010: The sellers are getting bigger, said Anu Singh, a managing director with Kaufman Hall and author of the report.
Before 2010, health systems whose revenue was in the ballpark of $750 million to $1 billion were largely satisfied serving one or two cities. Now, those systems are gunning to serve entire counties or even larger regions, Singh said.
"If that's the path, many will be looking to uplink with organizations with comparable cultures or strategic initiatives," he said.
Even so, Singh said he doesn't view the deals taking place as being defensive. Rather, he sees them as straightforward efforts to be more successful in their markets.
Kaufman Hall's report included the proposed Charlotte, N.C.-based Atrium Health and Winston-Salem, N.C.-based Wake Forest Baptist Health merger announced in April. That deal would create a 49-hospital system with combined operating revenue exceeding $9 billion.
It also cited the proposed merger announced in May between two Wisconsin-based systems: Gundersen Health System and Marshfield Clinic Health System. Kaufman Hall's report noted the two systems have little overlap in their existing markets, which combined will stretch from southwestern to north central Wisconsin with locations in Iowa and Minnesota.
Average seller size by revenue grew from $196 million in the first quarter of 2019 to about $597 million in the second quarter of 2019, Kaufman Hall found. That figure reached a record high of $409 million in 2018, according to the report.
Divestitures represented about 40% of the second-quarter transactions, most of which were made by for-profit health systems.
Ironically, for-profit systems were once active acquirers in such deals, Singh said.
"To put it bluntly, I think they're choosing which markets they can be successful in and which ones they can't," he said, "and in the ones they can't, they're looking to divest."
Increasingly, Singh said he's observed not-for-profit health systems buy and repurpose for-profit hospitals to deliver services they don't have space for in their existing hospitals, such as behavioral health and rehabilitation services. He declined to give examples, citing client confidentiality.
Ongoing wrangling over the Affordable Care Act, a potential recession and the upcoming presidential election could convince organizations to close their deals before the end of 2019, said Bret Schroeder, a healthcare expert with PA Consulting.
"That might be why 2019 has been so frantic with the number of deals and the transaction size," he said. "They might think, 'We better get it done this year if the environment will change next year.' "
For his part, Singh said closing a deal one year versus the next to get ahead of a regulatory change is not the norm. That said, he predicts there will come a point when health systems stop looking at each other and instead toward other types of partners, such as health insurers or behavioral health providers, for example.
"I don't see a net-net reduction in all types of healthcare services M&A coming," he said. "Within the segments, sure, I think there could be some change over time."