Hospitals and health systems have a complicated path ahead of them in 2023. Headwinds such as inflation, labor issues and operational costs have hit the industry hard, and M&A activity over the past two years has stagnated. Preliminary numbers from 2022 show that transaction volume remained level with 2021 numbers, with 65 and 64 announced mergers, respectively. Spending values were also remarkably unchanged year over year, based on disclosed prices. Spending in 2022 reached $9.2 billion, a small 7% decline compared with totals in 2021, which hit $9.87 billion.
For context, in 2020, transaction volume climbed to 79 deals, and in 2019, it soared to 100 deals.
COVID-19 is an obvious culprit for the slowdown, but the pandemic has exasperated other industry woes. This month, more than 7,000 nurses in New York City went on strike for 10 days over staffing issues at Montefiore Bronx and Mount Sinai Hospital. According to a report from Kaufman Hall, supply expenses at hospitals were up 3% year over year in 2022 and labor expenses were up 9%.
Health systems and hospitals must also wrestle with new competition and disruptive clinical forces. Major consumer retailers like CVS and Walgreens invested significant capital in the outpatient care market this past year. CVS purchased Signify Health for $8 billion and VillageMD, a subsidiary of Walgreens, acquired Summit Health-CityMD, a provider of primary, specialty and urgent care, for $8.9 billion.
And executives at both companies signaled that more deals and acquisitions are coming.
So, where does the market go from here?
Activity from 2022 highlights an important strategy for systems: increasing scale. Although deal volume was lower, the types of deals seemed more impactful. Large health systems merged under one umbrella, creating organizations with multi-billion-dollar revenues and presence in a dozen states. A large scale provides negotiating power in talks with payers and the ability to adapt quickly to changing market forces.
Advocate Aurora Health and Atrium Health struck a large merger agreement, creating a health system with more than $27 billion in annual revenues. The new organization, called Advocate Health, will have a combined footprint across Illinois, Wisconsin, North Carolina, South Carolina, Georgia and Alabama. It will serve 5.5 million patients, operate more than 1,000 sites of care and 67 hospitals and employ more than 7,600 physicians and nearly 150,000 teammates. There was no geographical overlap between these two systems, so their network size grew significantly.
“The world of healthcare as we know it is changing at warp speed – and it is rapidly becoming more digital, personalized, scientific and complex,” president and chief executive officer of Atrium Eugene A. Woods said in a statement announcing the deal. “This strategic combination will enable us to…launch new, game-changing innovations.”
Instead of buying small, regional hospitals, strategic buyers went after portfolios of hospitals with affiliated home health networks, physician groups and outpatient clinics. Most of the deals in 2022 targeted hospitals with more than 75 beds and affiliate organizations. It’s no longer solely about hospital count; it’s about diverse market penetration and using mergers to create vast delivery systems.
It’s also worth noting that hospitals might not be the most important targets for health systems in the future. Building profitable outpatient care services to supplement traditional hospital revenues will be key for a hospital to succeed. Expect health systems to invest heavily in urgent care and ambulatory surgery centers. HCA Healthcare, Inc., Hartford Healthcare, AdventHealth and other health systems have all been pushing into these markets with strategic investments.
We also expect health systems to find new opportunities in digital health. Several health systems, such as Ascension, Northwell Health, Orlando Health and NewYork-Presbyterian, have all established venture capital arms to test new technologies and invest in innovative startups. It’s a strategy that will allow health systems, especially those in the not-for-profit space, to remain competitive with financial investors and corporations pushing into health care.
