Health systems are increasingly pursuing mergers and acquisitions in the South, a region where demand for care is growing and there are fewer regulatory barriers.
More than a dozen states have passed laws over the past several years designed to increase oversight of healthcare transactions, but Southern states have largely stayed on the sidelines. As a result, deals involving hospitals are expected to pick up in the South, particularly in markets that feature growing populations, a high number of Medicaid patients and less stringent merger reviews, merger and acquisition advisers said.
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Potential Medicaid cuts could also drive up deal-making in the 16-state region spanning from West Virginia to Texas, as well as Washington, D.C., advisers said. Hospital finances are expected to decline if Republicans follow through with proposals to eliminate enhanced federal payments for states that expanded Medicaid coverage and cap Medicaid funding, among other proposals.
Many community hospitals are already struggling. Nearly 30% of hospital transactions announced last year involved a financially distressed facility, data from consultancy Kaufman Hall shows.
“If you have cuts to Medicaid, that will hasten the trend of more distressed hospital transactions and toward further consolidation in the healthcare space,” said Robert Miller, a healthcare attorney at law firm Hooper Lundy & Bookman.
The number of announced hospital deals in 2024 involving facilities located in the South was nearly double the next-highest region, according to Kaufman Hall data. Of the 72 announced hospital merger and acquisition proposals, 27 were in the South, including Birmingham, Alabama-based UAB Health acquiring five Ascension St. Vincent hospitals in Alabama, compared with 14 in the Northeast.
"If an investor is looking at a state like California versus a state in the Southeast without as rigorous of a review process, all else being equal, the investor would go to the other state,” said Alexandra Busto, a healthcare lawyer at law firm Nixon Peabody.
Some investors, such as private equity firms that are the target of several state merger review laws, focus their company portfolios on the Southeast, in part because those states don't have corporate practice of medicine laws, she said. The laws prevent corporations from owning or controlling medical practices.
States in the West, Northeast and Midwest have introduced legislation this year to widen the scope of existing merger notification and review laws, potentially creating a bigger gap in oversight between the states that have those laws on the books and those that do not.
The laws, which vary by state, can require up to 180-day review periods, detailed requests regarding ownership structure and approval from attorneys general. Some states only require 30-day reviews and minimal, if any, transaction-related data.
“Many of the states in the Southeast don’t have some of the significant regulatory barriers we see in California, Oregon, Washington, New York, New Jersey or Massachusetts,” said Frank Carsonie, a healthcare attorney at law firm Benesch.
Typically, state regulatory oversight does not stop hospital merger or acquisition talks, Carsonie said. Executives consider many other factors, such as population growth, competition, availability of primary and specialty care and payer mix.
But deals are more expensive when health systems face regulatory hurdles, which may prompt them to look at states with more favorable regulatory environments.
“The resources and time spent on merger proposals are much more streamlined in states that don’t have those laws,” said Timothy McHale, a healthcare lawyer at law firm Epstein Becker Green. “You may not have to hire regulatory counsel, and as far as timing, you don’t have the big elephant in the room on whether a deal will get through or not and how long it will take to close.”
Still, demographic trends typically play the biggest role in health systems' merger and acquisition evaluations, experts said.
“I suspect a lot of the action will be in Florida because it has the mix of a large population and relatively friendly regulatory environment,” Miller said.
Some Southern states are easing oversight for certain types of providers and transactions to try to keep hospitals viable.
Mississippi implemented a law last year that provides immunity from state antitrust laws for rural, county-owned hospitals pursuing mergers or acquisitions. The law was designed to support hospitals at risk of closing.
Other states, such as West Virginia, have passed legislation that would expedite state reviews of merger proposals involving a bankrupt hospital.
“Hospitals' ability to outpace minimal reimbursement increases through just expense reduction strategies is harder and harder, especially in the South,” said Anu Singh, Kaufman Hall managing director. "That's why we're seeing the pace of transaction volume pick up."
