Why hospital merger activity could rise in the second half of 2024

So far, the number of hospital mergers in 2024 is just about on pace with the number of deals announced last year.

Anu Singh, managing director of Kaufman Hall, expects to see robust M&A activity in the hospital sector in the coming months.

There have been 31 announced hospital mergers in the first half of 2024, according to Kaufman Hall, a healthcare consulting firm. In 2023, there were 65 announced hospital deals, up from 53 transactions in 2022, according to Kaufman Hall.

The first quarter of 2024 saw 20 deals, the highest number of transactions in a first quarter since 2020, but there were 11 announced mergers in the second quarter.

While there were fewer deals in the second quarter, the transacted revenue for the second quarter reached $10.8 billion, remaining near historic highs, Kaufman Hall says.

Beyond the number of deals or revenue, there are a number of factors that could lead to more deal-making in the second half of the year and beyond, says Anu Singh, managing director at Kaufman Hall.

In an interview with Chief Healthcare Executive®, Singh outlined a number of factors that should lead to more hospital mergers. And he says one big factor is that while some hospitals and health systems are performing better, many hospitals continue to struggle financially.

Some smaller hospitals are pursuing mergers while they have managed to recover somewhat, and want to seek a deal before their status worsens.

“We're also seeing organizations who say, … ‘We're never getting back to that, and we're trying our hardest to mitigate the negative cash flow. We can't.’ So we're also seeing some organizations that are almost coming into the partnership discussion with the level of distress where a financial trigger is what's driving them to partnership,” Singh says.

Another indicator of the high interest in deal-making came just as the third quarter began, when two midwest health systems announced plans for a mega-merger.

Sanford Health and Marshfield Clinic Health System are planning a merger that would create a system with 56 hospitals and $10 billion in revenue. If the deal is finalized, Marshfield Clinic would become part of Sanford Health.

• Read more: Northwell Health, Nuvance Health plan to merge, form 28-hospital system

Better performance

While some hospitals and health systems are seeing stronger financial performance than others, many providers are in a better place than they were a year ago. Kaufman Hall’s median operating year-to-date margin index, as of May, was 3.8%.

With some health systems seeing improved finances, they may see themselves in a better position to explore mergers and acquisitions. “I think it opens up a lot of opportunities,” Singh says.

“If you've realized the benefits of coming together or creating some scale, and that's in the past for most organizations, now you're looking at specialty,” Singh says. Some may be looking at advancing their capabilities and resources to deliver better care with less expense, he adds.

As systems get bigger, Singh says size can have its advantages, but organizations also must think strategically to avoid setbacks.

“You're going to see that there's a little bit of benefit of size, but at the same time, you want to make sure that organizations that are high performing remain nimble, in their ability to execute on some of these strategic initiatives, because size can also get in the way of being focused and being nimble at times,” he says.

With hospitals and systems more removed from the worst of the COVID-19 pandemic, organizations are doing more planning for the long-term, which could lead to more partnerships.

“I think organizations that are developing those complementary capabilities are now being rewarded for them,” Singh says. And he adds, “Organizations are stepping back and thinking about what really drives our long term strategy going forward.”

Strategy over scale

With hospital mergers, Singh is seeing a shift toward an emphasis of strategy over scale.

He points to Risant Health, the subsidiary formed by Kaiser Permanente. Risant has said its goal is to accelerate the growth of value-based care. Risant announced plans in June to acquire Cone Health, a hospital system based in North Carolina.

The deal comes after Risant announced in April that it had completed the acquisition of Geisinger, the Pennsylvania-based health system.

“When Cone Health announced its transaction with Risant, they realize that Risant wasn't in the hospital business except for Geisinger, and certainly not in the hospital business in North Carolina, but in both those instances, there was some level of compliment, some level of benefit that the organizations must have seen in another partner that were well beyond geography, that were well beyond proximity,” Singh says.

He also noted that the planned merger of Sanford Health and the Marshfield Clinic Health System also involves two systems without any geographic overlap. Sanford is based in South Dakota, while Marshfield Clinic is based in Wisconsin.

“The elements of strategy, the elements of complements, the elements of intellectual capital and resources that can be provided from one organization to another in this new world we're in right now, it doesn't necessitate geographic proximity,” Singh says. “It also doesn't necessitate being in the exact same business or industry segment as your chosen partner.”

Academic partners

More academic health systems have been partnering with community hospitals, Singh says.

The University of Alabama Health System said in June that it is planning to purchase Ascension St. Vincent’s five hospitals in Alabama, along with their associated clinics. More regional care networks have been built around academic systems.

“We're going to see that continue,” Singh says.

While the two organizations are not merging, Lifespan Health and Brown University are expanding their relationship with a host of new affiliation agreements, including significant financial investments. As part of the enhanced relationship, Lifespan is adopting a new name: Brown University Health.

Lifespan and Brown will remain separate, but the agreements also reflect the growing partnership of regional hospitals and academic systems.

Nonprofits and for-profits

Interestingly, nonprofit health systems are looking more at mergers and acquisitions than for-profit systems, Singh notes.

In the second quarter, none of the announced hospital deals involved a for-profit system acquiring a hospital. It’s only one quarter, so it may not represent a trend, but Singh still calls it “an important data point.”

Some for-profit systems are reducing their footprint. In addition to selling five Alabama hospitals to the UAB Health System, Ascension announced a deal in the spring to sell three hospitals to MyMichigan Health.

Conversely, nonprofit systems are looking to build new partnerships for a variety of reasons, Singh says.

“All the not-for-profits are being very focused on M&A strategy, whether they're academic medical centers, whether they're the religious sponsor, whether they're the national, the super regional, whether they're small, mini systems, even under a billion dollars in revenue, we're seeing all participation of all types, from the not-for-profit health systems, and looking at not just hospital opportunities, but non-hospital opportunities,” Singh says.

Regulatory hurdles

Federal and state regulators have opposed some planned hospital deals, leading the organizations to abandon their plans.

Novant Health dropped its plans to buy two facilities from Community Health Systems in a $320 million deal, after the Federal Trade Commission secured an injunction to delay the transaction. The FTC argued that the deal would harm consumers by reducing competition, while Novant said it planned to invest to preserve services in the region.

Regulators have moved to block other deals, and some healthcare industry analysts note that FTC and state officials could slow down deal-making.

But given the financial distress of some systems and healthier organizations looking to expand their capabilities, Singh says he doesn’t expect the pace of hospital mergers to slow.

“One election or one set of economic factors or one regulatory change isn't going to redirect so much strategy that it's going to cause the M&A activity to change its trajectory,” SIngh says.