Introduction & The Numbers
The Hospital sector saw a great deal of flux in 2023. Despite numerous macroeconomic and regulatory headwinds, year-over-year deal activity increased by approximately 10%, hitting 75 deals. For context, before COVID-19 rattled the industry, there were 96 hospital acquisitions and mergers in 2019. The market is on the rebound, but we’re still short of pre-pandemic levels.
Deal volume only tells part of the story, however. A year with 75 health system mergers is very different than 75 acquisitions of single-facility organizations in distress, for example. There was still a mix of large and small mergers, but the M&A market is becoming more top-heavy.
“We’re seeing larger health systems and multi-state organizations seek partnerships,” said Rex Burgdorfer, Partner at Juniper Advisory. “Most of the activity in the past few years has been driven by strategic reasons to adapt to headwinds, as opposed to financial necessity. The average size of a selling hospital today is ~$700 million in revenue, up from ~$100 million in 2008.”
Juniper Advisory offers M&A advisory services for health systems and hospitals in the non-profit space. The firm has represented large multi-state systems, academics, public, large rural facilities, safety net and critical access hospitals.
Mr. Burgdorfer’s insight matches what we see in the data captured in LevinPro HC. In 2023, there were 18 mergers closed between health systems, with each deal carrying an average size of 583 beds and at least seven hospitals. The average target revenue of acquired health systems was approximately $1.2 billion.
As competition in the outpatient care market heats up, many health systems decided to merge together, rather than buy a smaller community hospital, suggesting that scale and diverse revenue streams could help the organization remain competitive against new buyers like CVS and Walgreens, which have moved further and further into the healthcare services market.
Single-facility acquisitions averaged approximately $127 million in inpatient revenue in 2023, with an average bed count of 124 per deal.
Not-for-profit entities dominated the market as buyers, accounting for 50% of the acquisitions in 2023, continuing the trend from 2022. Only 11% of deals involved publicly traded organizations, with most of the buyers based in Asia or the Middle East. Regional arms of systems such as HCA Healthcare were active as well, and a few deals from government agencies, private equity firms and real estate investment firms were completed in 2023.
Trends
Headwinds that emerged during (or were exacerbated by) the COVID-19 pandemic continue to hit the hospital industry hard. Labor shortages and costs were particularly difficult to overcome in 2023. In October, Kaiser Permanente and the Coalition of Kaiser Permanente Unions reached an agreement following a three-day strike involving more than 75,000 healthcare workers—the largest-documented healthcare strike in U.S. history.
Kaiser Permanente was actually involved in one of the largest mergers in 2023. It acquired Geisinger Health, which comprises 10 hospitals and 133 primary care and specialty clinic sites. The deal closed back in March. The combined health system is expected to generate more than $100 billion in revenue.
Following the Kaiser strike, in November, 2,400 nurses at three hospitals owned by HCA Healthcare in Southern California launched a five-day strike on November 22 in the sixth month of contract negotiations. Represented by SEIU 121RN, the striking nurses work at HCA’s Riverside Community Hospital, West Hills Hospital and Los Robles Regional Medical Center in Thousand Oaks.
Anecdotally, we have tracked more than 40 labor strikes in the healthcare industry in 2023, with workers demanding higher minimum staffing requirements and higher wages. In such a capital-intensive industry, these labor headwinds are bound to have a lasting impact.
Regulatory roadblocks have also increased in 2023, delaying or blocking mergers altogether. In February, the State University of New York Upstate Medical University and Crouse Health System called off plans to merge, which they had been negotiating since April 2022. The Federal Trade Commission voiced opposition to the deal, claiming it would leave the Syracuse market with only two hospital systems. In an 88-page report, the FTC claimed that the combined entity would control a 67% share of commercially insured inpatient services in Onondaga County.
California-based John Muir Health canceled plans in December to acquire San Ramon Regional Medical Center from Tenet Healthcare. The decision was announced just one month after the FTC sued to block the deal. The health systems called off negotiations “due to the cost and disruption of litigation,” according to a statement.
Although there was an uptick in deal activity in 2023, it’s clear the increased regulatory pressure has slowed deal-making in the market. This issue could continue into 2024 as well; the FTC and Department of Justice released new merger guidelines in December. The guidelines could give officials more tools to block mergers, especially because they place an increased emphasis on the effects of consolidation, a major trend in the healthcare industry.
Perhaps the most important trend shaping the hospital industry is the industry shift to outpatient care settings, driven by patient preferences, changing demographics and value-based reimbursement models.
“The movement from inpatient to outpatient is noticeable and here to stay,” Burgdorfer said. “It is a tectonic shift for acute-only health systems and providers.”
It’s difficult to talk about the Hospital M&A market without addressing M&A activity outside the sector. Traditional hospital acquisitions might not hold as much value as they once did. Health systems and hospitals are not targeting low-acuity settings and services. For instance, HCA struck a deal in May to acquire 41 urgent care centers in Texas owned by FastMed, and health systems have pursued transactions in areas such as home health, physician groups and medical office buildings.
According to Kaufman Hall’s National Hospital Flash Report: December 2023, national outpatient revenue (per calendar day) was up by 9% in November 2023 compared with November 2022. Inpatient revenue for the same time frame was only up 5%. For hospitals and health systems, the importance of having a robust outpatient network to complement facility-based care cannot be overstated.
2024 Outlook
Hospital M&A activity in 2024 is likely to remain strong. Varying market forces will continue to drive health systems and hospitals to seek partnerships and acquisitions in the outpatient market.
Plus, although several large players dominate certain markets, the industry remains ripe for consolidation.
“The market remains highly fragmented,” Burgdorfer said. “If you add up the market share of the 50 largest organizations, they still make up less than 25% of the industry [based on total revenue]. The structure of the insurer category is the exact inverse.”
Burgdorfer predicts that mid-size systems will continue to seek scale to make a dent in that equation. Since the hospital industry is so capital-intensive, regulated, and complicated, business combinations can often afford better access to capital and medical reach in their respective markets.
There have already been several hospital deal announcements this year, including a letter of intent between Akron, Ohio-based Summa Health and Health Assurance Transformation Corporation, a company founded by private equity firm General Catalyst. If January is any indication, the market in 2024 is definitely going to be heating up.
