Hospital and health system merger and acquisition activity was strong in the first quarter of 2019 and generally consistent with levels seen in recent years, a new Kaufman Hall report found.
The analysis identified 27 transactions in the quarter—about half of those in January—compared with 30 in the first quarter of 2018, which the report said was a very high activity period. But the total transacted revenue was less than half in the recently ended quarter compared with the prior-year quarter, and the average sellers in those transactions had about half the annual revenue of those in 2018, according to the report.
Anu Singh, a managing director at Kaufman Hall and author of the report, cautioned against reading too closely into quarter-by-quarter deal counts, which he said can be clouded by noise. The first quarter of 2019 reflected ongoing themes his firm continues to monitor: Systems that are doing well are looking for strategic partners and to expand into new geographies.
"The themes remain predominant and clear: This is an industry-wide response to transformation, and the themes we've been talking about for years continue to be exhibited quarter to quarter," he said.
The report's conclusions were in stark contrast to that of Ponder & Co., which found that the number of deals announced in the first quarter of 2019—14—was the fewest of any quarter since the fourth quarter of 2009. Ponder & Co. said it was the fourth consecutive quarter in which hospital M&A lagged the rolling annual quarterly average.
Eb LeMaster, a managing director at Ponder & Co., explained in an email that his report used a narrower definition of deals than Kaufman Hall did: Only change-of-control transactions. Kaufman Hall's report, by contrast, included management agreements and structures that don't involve ownership stakes.
Kaufman Hall found total transacted revenue in the quarter was $4.9 billion, down from a "very high" $12.7 billion in the first quarter of 2018, according to the report. Total transacted revenue in the first quarter of 2019 was still higher than that of the same periods in 2015 and 2016.
The average seller in the recently ended quarter had about $196 million in annual revenue, compared with $409 million in all of 2018, the report found. The seller size will change as the year progresses and more deals are made.
Singh said he does not believe the smaller seller size is significant.
"Until we see data repeat itself over several quarters, it's premature to make hard and fast conclusions about the market," he said.
The quarter's dealmaking revealed another theme: hospitals and health systems are increasingly interested in more loosely integrated partnerships, such as joint ventures, management service agreements, minority investment models and other structures, the report said.
A decade ago, financial need was the main driver behind partnership activity, Singh said. Today, hospitals are more likely to want to build on strategic initiatives or operational capabilities. "When we get into those unique situations, not everything has to be a full-blown asset sale or a membership substitution," Singh said. "You can deploy more creative ways to structure some of those transactions."
Some of the more loosely integrated structures allow organizations to retain local decisionmaking around things like the type of non-acute services to offer and physician hiring, he said.
The healthcare industry is shifting from being focused on owning and controlling things to being held accountable for outcomes in value-based payment arrangements, said David Johnson, CEO of consultancy 4sight Health. Along with that, providers are experimenting with different types of partnerships and affiliations in the hope they can be more competitive.
"The proof is always going to be in the pudding," Johnson said. "Some partnerships work great and really do deliver on the promise, others not so much."
Seven of the 27 transactions in the quarter were among academic medical centers. Singh said he expects the industry will continue to see academic medical centers try to broaden their service areas, especially if there are community hospitals or other systems in their region with whom partnerships are possible. These types of providers offer care at the highest levels of complexity and expanding where those services are delivered goes hand-in-hand with the industry's movement toward population health management, Singh said.
One example was the announcement in March that UPMC would expand into Maryland by pursuing an affiliation with Western Maryland Health System. The two providers have had a clinical affiliation since 2018. There was also the announcement that suburban Chicago-based Palos Health would fully integrate into Loyola Medicine.
For-profit health systems were buyers in seven of the 27 announced transactions, Kaufman Hall found. Religiously affiliated health systems were the acquirers in five of the transactions. In those cases, the sellers were non-affiliated.