Hospital mergers and acquisitions are poised to rebound in 2025, but new state oversight laws will likely temper that activity.
The number of announced hospital deals dipped 13% over the 12-month period ended Nov. 15, according to data from consultancy PricewaterhouseCoopers. While activity is expected to tick up, health systems' focus may shift from hospitals to outpatient facilities due to the threat of longer regulatory reviews under newly empowered state watchdogs, advisers and attorneys said.
Related: Hospital merger activity to increase in 2024
Health systems will have opportunities in 2025 to acquire financially struggling hospitals or those that are part of health system restructuring plans, advisers said. Some national health systems are divesting hospitals as they go through bankruptcy or downsize in markets where they aren't competitive.
“There are a lot of divestitures going on,” said Colin Luke, a healthcare attorney at law firm Holland & Knight. “Health systems don’t want to have a single hospital in a state. They want enough market concentration for a hub-and-spoke model where they can negotiate better contracts with payers or employers.”
Health systems could also be incentivized to pursue hospital acquisitions in states with less regulatory oversight to gird against some potential policy changes under President-elect Donald Trump.
Providers are concerned lawmakers may slash state Medicaid programs if President-elect Donald Trump and Congress follow through on his promise to move Medicaid to block grants, potentially limiting states' funding.
In that scenario, states may end up reducing Medicaid coverage, leading to an increase in the uninsured population. When hospitals treat more uninsured patients, their margins typically decline.
Some health systems have retained legal counsel to talk through some of the implications surrounding a possible reduction in Medicaid funding and potential defensive M&A strategies, Luke said.
“There is a lot of concern about what is going to happen with Medicaid,” he said.
Bolstered state transaction notification and review laws may cause providers to steer away from hospital deals entirely.
New transaction-linked notification requirements are poised to increase the length of regulatory reviews. Time, along with the associated legal costs tied to longer review periods, can deter or scuttle some merger proposals.
“There is a substantial regulatory review and approval process across many geographies and states,” said Nick Donkar, health services deal leader at PwC.
California is one of more than a dozen states that have imposed stricter healthcare transaction review laws over the past two years. The California Office of Affordability in January 2024 started reviewing merger and acquisition proposals involving any entity with at least $25 million in annual revenue and those located in mental health or primary care shortage areas, among other criteria.
While there have been several California academic health system-led acquisitions, many providers will continue to wait and see how the Office of Affordability will exercise its regulatory muscle before pursuing a deal, said Alex Busto, a healthcare lawyer at law firm Nixon Peabody.
In addition to California, states including Rhode Island, New Mexico, Oregon, Minnesota and Massachusetts in recent years have implemented laws designed to increase healthcare transaction transparency. Some of those states, such as New Mexico, now have the power to enforce price caps, service protection provisions or other conditions before approving a proposal.
“Some of my clients are shying away from certain states that have big healthcare transaction review laws,” said Ken Marlow, a healthcare attorney at law firm K&L Gates.
Instead, some systems are focusing on less expensive and less risky deals featuring ambulatory surgery centers and other outpatient facilities, advisers said.
“Health systems are spending more time on enhancing relationships with physicians rather than pulling another hospital or system into the fold,” said Roger Strode, a healthcare lawyer at law firm Foley & Lardner. “This move of lower-acuity and middle-acuity care to outpatient settings is not going to end.”
