IPA

Hospital M&A: Bigger Isn’t Always Better

That was the week that was. Two huge hospital mergers came to an end, one successfully and the other, not. In announcing the end results, CEOs involved in those deals each emphasized their goal was not about “getting bigger,” but to deliver better health care to more patients. Seriously, what CEO is going to say they just need more facilities to boost the bottom line and don’t care about patients?

First, the deal that crossed the finish line. For 15 months, Catholic Health Initiatives and Dignity Health negotiated the details of the definitive agreement they signed in December 2017. The deal closed on February 1, creating one of the largest not-for-profit health systems in the country with $29 billion in revenue, 142 hospitals and more than 700 care sites in 21 states. Dignity Health CEO Lloyd Dean noted in the announcement that, “We didn’t combine our ministries to get bigger, we came together to provide better care for more people.”

On the other hand, Baylor Scott & White Health and Memorial Hermann Health System held merger talks since October 1 last year, only to conclude they were better off as separate entities. On February 5, they announced the talks have ended. Their merger would have created a $14 billion not-for-profit system with 68 hospitals in Texas. Memorial Hermann CEO Chuck Stokes was quoted in the release saying, “Our goal was never about getting bigger. Our goal is to create a model for integrated, consumer-centric, cost-effective care.”

And that was the goal, presumably, behind the 79 deals announced in the Hospital sector in 2018. The total is just one deal more than 2017’s 78 deals, but well off the recent high of 100 deals in 2015.

The true departure from previous years is the spike in the number of hospitals involved in those deals. Last year, 257 hospitals changed hands, for an average of 3.3 facilties per deal. In 2017, the average was 2.8. The last time we saw 3.3 hospitals per deal was in 2013, when the big for-profit chains merged. That year, 292 hospitals got new owners or management.

The combined number of beds in 2018 was 32,327, an average of 126 per hospital. That was 11% lower than the previous year, when 36,424 beds were in play. To be fair, 2017’s combined bed total was the highest since 2013 (again), which saw about 46,000 beds change hands.

Two big deals account for the year’s spike. LifePoint Health, with 68 hospitals and 9,254 beds, was taken private by RCCH HealthCare Partners in July. A month later, HCA Healthcare (NYSE: HCA) acquired Mission Health, a seven-hospital system in North Carolina with a total of 991 beds.

Another trend kept that spike from rising even higher. Forty-seven of the 79 deals involved just one hospital, and 12 of those were rural community or critical access hospitals. Although many of the targets in 2018 were struggling financially, only three deals involved hospitals in bankruptcy proceedings. One deal targeted a hospital that Tenet Healthcare (NYSE: THC) had closed due to declining patient volume, but it was reopened as a hospital. These days, closed hospitals find new uses as well as new owners.

We’ll have a lot more data and analysis in the 25th edition of The Health Care Services Acquisition Report, scheduled to be published in March. Although unlikely, the numbers reported here are preliminary and subject to change until the reports are published.

 

 

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