Seven months into 2017, hospital mergers and acquisitions in the United States are slow and on the smaller side. Even with Community Health System’s (NYSE: CYH) ongoing divestiture announcements, just 51 transactions have been announced through August 1. In all of 2016, 84 transactions for U.S. hospitals were announced. With five months to go, that’s a target this sector could meet or even surpass, but that’s not a very high bar to reach, considering there were 96 deals for U.S. hospitals announced in 2015.
Spending on this year’s hospital deals has been anemic. Through August 1, almost $2.3 billion has been spent on mostly private hospital transactions, with the largest, at $1.4 billion, coming from a REIT, Medical Properties Trust (NYSE: MPW). Last year, a total of $6.2 billion went to U.S. hospital M&A, and the largest transaction was $1.25 billion, from the same REIT.
The REITs Have Arrived
REIT deals with privately held hospital systems came to the fore earlier this year, as Boston-based Steward Health Care System, backed by Medical Properties Trust and Cerberus Capital Management, acquired eight hospitals (1,818 beds) from Community Health Systems in February, and then acquired IASIS Healthcare, a portfolio company of TPG, and its 17 hospitals (3,600 beds), a behavioral healthcare facility, and 140 outpatient facilities in May. No prices were disclosed in those transactions.
In a transaction concurrent with the IASIS acquisition, Medical Properties Trust acquired the real estate assets of 10 IASIS hospitals (2,400 beds) and the behavioral health facility, for a total of $1.4 billion.
Global Medical REIT (NYSE: GMRE) has announced two deals this year, although for much smaller targets, Great Bend Regional Hospital in Kansas, and two Carrus hospitals in Texas, one a long-term acute care facility and the other an inpatient rehab facility, for a combined $50.5 million (and a total of 73 beds).
Four private equity firms have announced five deals so far this year, all without revealing prices, and they’re not the “usual suspects.” Americore Health, LLC, based in Fort Lauderdale, Florida, was recently formed and focuses its investments on rural hospitals. Its first two acquisitions were privately held Pineville Community Hospital in Kentucky, and not-for-profit Ellwood City Hospital in Pennsylvania. Alecto Healthcare Services LLC, based in Long Beach, California, acquired two not-for-profit hospitals in the Ohio Valley region.
Quorum Health (NYSE: QHC), a 2016 spin-off from Community Health Systems, found two private equity firms to take three troubled hospitals off its hands: SHS Tennessee, LLC acquired two 45-bed facilities in Tennessee, while NNZ Holdings, LLC bought the 60-bed Cherokee Medical Center in Centre, Alabama.
Several large health systems have been in play this year, in addition to IASIS. Just last month, NantWorks, LLC acquired a majority stake in Integrity Healthcare, LLC, the former Daughters of Charity system in California, consisting of five hospitals and 1,650 beds. In South Carolina, the Greenville Health System agreed to merge with Columbia-based Palmetto Health, a not-for-profit with four hospitals and 1,274 beds. And HCA (NYSE: HCA) solidified its Houston holdings with the $725 million acquisition of three area hospitals owned by Tenet Healthcare (NYSE: THC), adding a total of 1,048 beds.
Thanks to those large deals, some 19,335 beds have changed hands (or operators) in the first seven months of 2017, for an average of 429 beds per transaction. The average price per bed, at this point, is $283,565, which is fairly robust, but not as high as in 2016.
Last year, 18,703 beds were involved in the 84 U.S. hospital deals, with an average of 249 beds per transaction. The average price per bed, however, was $425,407, mostly a result of Medical Properties Trust’s $1.25 billion acquisition of Steward Health Care’s real estate assets (including 1,768 beds) in September of that year.
For the record, 2015’s results were a cross between this year and last year. A total of 26,330 beds were involved in the 96 U.S. hospital deals announced that year, with an average of 286 beds per transaction. The average price per bed that year was a modest $237,896.
Second Half Outlook
Now that the Senate has dispatched the Republicans’ Better Healthcare Reconciliation Act and has begun working on a more bipartisan approach to repair the Affordable Care Act, the hospital M&A market may find greater equilibrium going into 2018. Congress’ first target is the individual health insurance exchanges, which relieves many hospital operators who dreaded the phasing out of Medicaid spending, no matter what year it was set to begin. With the threat of facing waves of newly uninsured patients abated, for now, the financial outlook isn’t as bleak as before.
With the exception of Community Health Systems and Quorum Health, many of the stronger health systems are looking to come together to form more robust models to address the continuing shift to value-based care and reimbursements. Economies of scale can’t support independence in that ecosystem, so partnerships or affiliations may fill the gap, as a way to skirt antitrust scrutiny. Either way, we don’t foresee a sudden downturn in this market. Keep watching.
