Nearly a third of announced hospital and health system mergers and acquisitions last year involved a financially distressed partner, a new report shows.
Waning COVID-19 relief funds and high labor costs pinched hospital margins in 2023, causing many health systems to seek financial stability with M&A partners. About 28% of announced merger and acquisition proposals included a hospital or health system in financial distress, up from 15% in 2022, according to a report published Thursday by Kaufman Hall.
Related: Hospital merger activity to increase in 2024
Kaufman Hall defines financially distressed transactions as those in which “a party has cited, or publicly available information has enabled [Kaufman Hall] to infer, an element of financial distress as a transaction driver,” a spokesperson said.
The proportion of financially unstable hospitals and health systems seeking merger partners was the highest since the 2019 figure of 19%, according to the report.
Here are five other takeaways from the report:
1. Number of announced transactions rebounds
The number of announced hospital and health system mergers and acquisitions totaled 65 last year, up from 53 in 2022.
Merger and acquisition activity dipped throughout the COVID-19 pandemic, reaching a record-low 49 in 2021. Until 2022, announced M&A hospital and health system proposals declined from the high of 117 in 2017.
While hospital and health system finances started to stabilize in 2023, many organizations continue to struggle, and the search for M&A partners for these organizations will likely continue, researchers said in the report.
2. Acquisition targets are larger
The average annual revenue of smaller hospitals or health systems involved in merger and acquisition announcements last year was $591 million, Kaufman Hall data show.
Although the size of acquisition targets dropped from a record-high average of $852 million in 2022, the average size of the smaller party involved in merger and acquisition talks significantly outpaced an average of around $330 million from 2012 to 2019, according to the report.
3. Hospitals consider other types of partnerships
Given the increasing size of smaller health systems and related infrastructure investments involved in mergers and acquisitions, providers are considering partnerships that are less capital-intensive, Kaufman Hall researchers said.
Some hospitals and health systems are exploring minority investments and clinical affiliations instead of M&As. Providers are pursuing alternative partnership models, due in part to capital constraints, providers’ desire to retain independence and regulatory challenges, according to the report.
4. Academic health systems pursue community hospitals
As academic health systems manage capacity constraints, they are increasingly pursuing community hospitals to offload some lower-acuity cases.
Several academic health systems have grown or look to grow their hospital networks across their respective states. Announced academic health system M&A proposals peaked in the third quarter of 2023, when those systems accounted for half of the 14 proposed transactions involving a nonprofit acquirer, Kaufman Hall data show.
5. Large nonprofit health systems reorganize
Chicago-based CommonSpirit Health, St. Louis-based Ascension and Altamonte Springs, Florida-based AdventHealth have sold hospitals and scrapped joint ventures in their respectively smaller markets, creating expansion opportunities for other health systems.
Some mid-sized systems, such as St. Louis-based BJC HealthCare, Saint Luke’s Health System of Kansas City, Missouri, Froedtert Health of Milwaukee, and Neenah, Wisconsin-based ThedaCare, have capitalized on large health system divestitures by expanding their hospital networks, according to the report.
