The first quarter of 2024 saw a significant rise in M&A activity in the hospital and health system space, according to a new report from Kaufman Hall.
Experts think that this M&A activity will continue to increase throughout this year and next — prompted by both financial distress and hospitals’ desire to improve strategic business lines like value-based care and digital healthcare services.
Why did Q1 2024 see such an uptick in deals?
Twenty M&A deals were announced in the first quarter of 2024 — the highest Q1 total since the first quarter of 2020, when 29 deals were announced. That compares with 15, 12 and 13 deals announced in the first quarters of 2023, 2022 and 2021 respectively.
The large number of transactions in the first quarter of this year relative to 2021-2023 reflects a shaking off of concerns that weighed on such deals over the past few years — such as financial uncertainty following the end of pandemic-era federal aid, inflation, and worries about staffing and volume — pointed out Michael Abrams, co-founder and managing partner of Numerof & Associates.
“At this point, these concerns are outweighed by FOMO (fear of missing out) on opportunities to gain additional market share with a suitable partner,” he declared.
In addition, the prospect that inflation will be higher for longer has likely dashed some hospitals’ hopes of returning to profitability anytime soon, pushing them to make a deal, Abrams explained. For hospitals in this situation, attaching themselves to a bigger partner was a choice they had to make in order to keep the lights on.
In Abram’s view, we are witnessing “the later phases of consolidation” in the U.S. healthcare industry.
That means that the biggest players will continue to make “opportunistic acquisitions of financially troubled hospitals” they think will complement their portfolio, such as Kaiser Permanente’s acquisition of Geisinger, he said. Health systems will also be on the lookout for large cross-market merger opportunities that will augment their business but won’t provoke regulatory pushback, he said, citing the Advocate-Aurora merger as an example of a deal like this.
“Mid-sized and smaller properties with strategic value that are late to the game will be in play, as will others that are impaired in some way,” Abrams declared.
New partnership models are emerging
Abrams pointed out that the hospital industry has seen some new partnership models arise over the past year — most notably from Kaiser Permanente and General Catalyst.
Last April, Kaiser Permanente announced its plans to acquire Pennsylvania-based Geisinger — and that this move is part of a larger plan. When Kaiser unveiled its plan to buy Geisinger, it also announced that the Pennsylvania system will be the first to join Risant Health — a new company Kaiser launched to operate nonprofit health systems.
Risant’s mission is to improve population health by scaling access to value-based care and coverage at health systems, according to Kaiser. The plan is for Risant to acquire a portfolio of nonprofit community-based health systems across the country.
A few months later, in October, General Catalyst launched a new company named Health Assurance Transformation Corporation, or HATCo for short. The company was founded with three main goals: to advise health systems on how to deploy better technology, to develop an interoperability model for technology solutions, and to acquire and operate a health system so that HATCo can “demonstrate the blueprint” of digital transformation in the healthcare industry.
In January, HATCo named its acquisition target. The company signed a non-binding letter of intent to acquire Summa Health, an Ohio-based health system.
Abrams noted that the HATCo deal and creation of Risant Health share something in common.
“They are bets on the promise of value-based care to provide a more sustainable approach to the business of delivering healthcare than fee-for-service has provided over the past decade or more. Those bets are bolstered by the number of retail companies like CVS, Walmart and Amazon entering healthcare delivery based on a value-based model,” he declared.
Abrams believes that such a model offers a remedy for the “fragmentation and other ills” that characterize the fee-for-service approach. He also said he is hopeful that efforts like HATCo and Risant Health can survive “what is certain to be a learning curve of significant consequence.”
However, neither deal is exactly a slam dunk in his opinion.
Will these new models be effective
Abrams noted that Kaiser was pouncing on an opportunity when it devised its Geisinger deal — Kaiser had been trying to expand its footprint beyond California for years.
Kaiser’s past efforts to extend its reach through acquisition have not been successful, but this is mainly because the health system was trying to convert primarily fee-for-service institutions to a value-based care approach, Abrams explained. Kaiser probably stands a better chance with its Geisinger acquisition, given that the Pennsylvania-based system has specialized in value-based care for years, he said.
As for HATCo’s planned acquisition of Summa Health, Abrams expects it to receive “heavy scrutiny” from regulatory authorities.
“Based on statements by the parties, HATCo appears to regard its access to innovation and technology through its health system partners as its major contribution, in addition to its access to capital. Despite assurances by General Catalyst regarding its long-term investment horizon, I remain skeptical. In the short term, this represents a new source of capital for Summa, but only time will tell if it represents a new partnership approach,” he remarked.
Another executive, Trilliant Health CEO Hal Andrews, thinks that the HATCo and Risant Health deals are both outliers.
He said that hospitals are never for sale unless they are “impaired in some way,” whether by market quality or financial performance.
“Neither Kaiser Permanente’s health plan experience in California nor General Catalyst’s balance sheet can change the underlying demographic factors in north-central Pennsylvania or northeastern Ohio,” Andrews stated.
What will the future of hospital M&A look like?
The industry is still waiting to see how experimental partnerships like the two mentioned above are going to play out, so it’s too soon to say whether these types of deals will become commonplace in the sector. But one thing is for certain in the eyes of Anu Singh, managing director at Kaufman Hall. He thinks more strategic partnerships are definitely on the horizon.
Singh defined strategic partnerships as mergers that combine “two organizations that are doing actually quite well but are seeking some level of complement of resources, capabilities or intellectual capital.”
“We’re moving to a model where scale and market presence is less important. What’s more important is the know-how to deliver a solution or experience that aligns with these new forms of healthcare delivery,” Singh remarked.
He predicted that hospital M&A activity will continue to increase over the course of 2024 and 2025. This is due not only to hospitals’ willingness to pursue strategic partnerships that help them excel in value-based care and digital healthcare delivery — but also because financial woes remain a major problem for some health systems.
Kaufman Hall’s end-of-year report for 2023 showed that financial distress drove nearly a third of hospital M&A activity last year.
Going forward, Singh thinks there could be a lot more deals that are partially motivated by financial troubles and partially motivated by strategic goals.
“There are deals with partial financial needs and partial strategic needs — where who [the hospital] picks as their partner is maybe the system that has the best capability but not necessarily the one they would have chosen five or 10 years ago when they were just pursuing scale. So hospitals are being more selective and who their partner is based on the capabilities and resources that complement and address their needs, as opposed to just pursuing greater geographic concentration and scale,” he explained.
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