April 13, 2022

There is safety in numbers, according to the well-worn adage.  However, should the numbers continue to grow, we might rightly assert that there is not only safety; there is substantial power.  This principle is no doubt behind humanity’s historic trend toward cooperation and incorporation: tribal clans transitioning to a national identity, individual workers creating influential trade unions, business entities forming cooperatives and even cartels.  With greater power comes greater opportunity for success, but it all starts with combining forces.

The importance of coming together is not lost on the hospital industry.  We have seen innumerable examples of individual facilities falling under the aegis of a larger healthcare system through the merger and acquisition (M&A) process.  This occurs because there is a perception among each of the parties that the deal will ultimately be beneficial to all.  Often, this is the case.  The combining of resources adds greater overall capability and creates economies of scale.  Greater profitability is usually the result.  It is with some surprise, then, that we have a report of a recent downturn in the erstwhile merger mania within the hospital sector.

Change in The Wind?

Analysts at consulting firm Kaufman Hall (KH) recently released a report concerning an M&A trend they have been tracking since the onset of the COVID pandemic.  According to the report:

M&A activity in the first quarter of 2022 continued a trend we have seen since the pandemic began: a smaller number of transactions. In recent quarters, this trend had been offset by a high percentage of “mega” transactions, in which the seller or smaller party has revenues in excess of $1 billion.

The report goes on to advise that, in the first quarter of this year (Q1 2022), there were no such mega transactions.  In addition, in four of the 12 announced transactions, the smaller party’s average revenues were below $100 million.  The report found noteworthy that a majority of the Q1 2022 transactions involved for-profit health systems as the seller.  In contrast, only one of the 12 transactions had a for-profit acquirer.

Again, the main takeaway of the report, is that the number of M&A transactions in Q1 2022 ran below historical, pre‑pandemic levels.  Total transacted revenue in Q1 2022 transactions amounted to $2.95 billion, which the report noted as being well below historical averages, and down significantly from a record $8.8 billion in the first quarter of last year.  By way of comparing apples to apples, the report details the number of M&A transactions for each Q1 over the previous six years.  They are as follows:

Year Q1	M&As
2016	25
2017	27
2018	30
2019	27
2020	29
2021	13

With this year’s first quarter recording only 12 such transactions, there does appear to be a change in the wind as far as the historic data.  Obviously, COVID cannot be discounted as a factor in this recent shift, but should we expect a continuation of this downturn in transactions?

Where Is This Heading?

The analysts who prepared this report are calling the recent shift in M&A trending an “interesting anomaly.”  They go on to state that they expect transition activity to pick up.  The rationale they provide for this outlook is based on an eventual resolution of temporary issues.  The current downturn in transactions is due to hospitals having to focus on fixing COVID-driven disruptions (e.g., burnout, staff shortages, case mix).  Once these issues are resolved, the thinking is that hospitals and health systems will get back to the business of merging with, or acquiring, other facilities.

Anu Singh, managing director and leader of the partnerships, mergers & acquisitions practice at Kaufman Hall, recently stated:

In the long term, however, the imperatives of scale illuminated by the pandemic will continue to drive increased interest in strategic partnerships between like-minded organizations focused on transforming care in the communities they serve.

As if to signal a confirmation of Mr. Singh’s optimism, just last week, Intermountain Healthcare and SCL Health completed a merger, creating one of the nation’s largest nonprofit health systems.  The new system, which will use the Intermountain name to reflect the parent entity, will operate 33 hospitals and hundreds of clinics across seven states and insure 1 million people in Utah and Idaho.

While this mega merger has succeeded, that doesn’t necessarily mean that we’re off to the M&A races once more.  There are still government minefields that must be negotiated—both in Washington and in the state house.  For example, Rhode Island’s two largest health systems have scrapped plans to merge following a legal challenge from the Federal Trade Commission and the state’s attorney general.  The Biden administration has made it a priority to crack down on consolidation in the healthcare industry and issued an executive order calling on antitrust agencies to review and revise merger guidelines.

So, while some may be looking for merger mania to get back on track, there are still obstacles being placed in the path of those who are looking to consolidate.  It is yet to be seen if we will get back to the number of M&A transactions that we witnessed just a few years ago.

We at MiraMed Global Services want to support you in any way we can.  For a list of our hospital-specific services, please check out our website at www.miramedgs.com or contact us at info@miramedgs.com.