Transformative Pressures and Opportunities for Hospitals and Health Systems Drive Mergers and Acquisitions, According to New Kaufman Hall Report
Average size of seller by annual revenue remains above historical averages while trend toward partnerships between leading health systems continued in 2019
CHICAGO – January 9, 2020 - Mergers and acquisitions (M&A) continued to permeate the healthcare financial landscape, often driven by the potential for hospitals and health systems to transform their business model, in the face of increased pressure from existing and new competitors, as well as changing consumer demands and government regulations. Those are just a few of the findings in Kaufman Hall’s new report, 2019 M&A in Review: In Pursuit of the New Bases of Competition.
While the $278-million average size of sellers by annual revenue in 2019 was down from the historic high of $409 million set in 2018, it still remained well above recent historical levels. Additionally, the trend toward partnerships between financially strong or market-defining health systems continued, with three announced transactions falling into the category of “mega-mergers” (transactions in which the smaller partner had more than $1 billion in annual revenue) and 11 where the smaller partner had annual revenue between $500 million and $1 billion. In five transactions, the smaller partner had a credit rating of “A” or higher. Kaufman Hall classified only 20 percent of sellers as financially distressed, equal to the percentage in 2018.
Overall activity remained strong and steady as well, with 92 transactions announced in 2019 compared to 90 in 2018.
Other key findings in the report include:
- Partnerships continue to diversify in both form and participants, as competition increases to control healthcare’s “front door.” Payers, health systems, physician practices and digital health companies are increasingly looking to align with legacy healthcare delivery organizations, build additional consumer access points, develop lower-cost sites of care and improve consumer convenience and access.
- Not-for-profit systems continued to be the primary acquirers of other health systems, accounting for 80 percent of transactions in 2019. Of those, 66 percent involved the acquisition of another not-for-profit organization while 14 percent saw not-for-profits acquire for-profit health systems. For comparison, not-for-profits were the acquirers in 76 percent of transactions in 2018, 76 percent in 2017, and 75 percent in both 2015 and 2016.
- Health systems continue to look across state lines, or leapfrog geography entirely, to seek out new growth opportunities, diversify bases of operations and pursue greater complements to existing operations. There were four such cross-state transactions in 2019, a similar number to those observed last year.
“What we saw in M&A activity in 2019 represents a clear turning point away from the aggregation of assets and toward real transformation of hospitals and health systems,” said Anu Singh, managing director at Kaufman Hall. “Acquirers are less focused on obtaining ‘more of the same’ and instead are looking for ways to expand their portfolios, market opportunities and service offerings, especially when it comes to consumers. The transactions we’re seeing, for the most part, are being driven more by strategic considerations than purely financial concerns. It’s a trend we expect to see continue in 2020, and also accelerate in terms of more cross-vertical partnership activity.”
The 2019 report notes several changes in the healthcare landscape that are contributing to the need for transformation. Competitive approaches from organizations such as CVS Health, which launched the first of its HealthHUB locations and later announced plans to expand the concept to 1,500 locations, and the opening of the first “Walmart Health” location that offers primary care, dental care and behavioral health, are spurring hospitals and health systems to rethink some components or all of their business model.
Consumer demand for friction-free, convenient and transparent experiences was another factor noted in the report. Previous Kaufman Hall research found that only 36 percent of parents would choose their child’s primary care physician for a minor illness or injury, and 72 percent would opt for an alternative option if they had to wait more than one day for an appointment. The ability to deliver a better overall consumer experience will continue to factor more heavily into decisions, necessitating a substantial change over the current approach for many.
Changes by CMS in its 2020 Outpatient Prospective Payment System (OPPS) final rule requiring hospitals and health systems to offer “consumer friendly” price information by 2021 on roughly 300 shoppable services are placing further pressure on legacy healthcare organizations. When coupled with a drive by insurers, risk managers and employers to change the high and inconsistent costs of legacy providers, the report concludes that M&A activities aimed at transformative change—including reductions in total cost of care—will remain strong for the foreseeable future.
“Hospitals and health systems cannot be complacent and rely on historical success. Tried and true business models are becoming obsolete and entirely new approaches to thrive in transformation will be required to compete in this new market reality,” said Singh. “The way we deliver and consume healthcare is changing rapidly. In order to compete, especially against competitors with deep pockets or specialized expertise, legacy providers need to invest, build or collaborate to form new strategies and rethink operations and still be able to move quickly to execute on market opportunities. This report demonstrates that healthcare leaders understand this and are taking the necessary steps to enable their organizations to reinvent themselves as needed to come through the current market turbulence in even better shape than they went into it.”
Read through and download a copy of the 2019 Healthcare M&A in Review: In Pursuit of the New Bases of Competition.
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Kaufman Hall provides a unique combination of software, management consulting and data solutions to help society’s foundational institutions realize sustained success amid changing market conditions. Since 1985, Kaufman Hall has been a trusted advisor to boards and executive management teams, helping them incorporate proven methods, rigorous analytics and industry-leading solutions into their strategic planning and financial management processes, with a focus on achieving their most challenging goals.
Kaufman Hall services use a rigorous, disciplined, and structured approach that is based on the principles of corporate finance. The breadth and integration of Kaufman Hall advisory services are unparalleled, encompassing strategy; financial and capital planning; cost transformation; treasury and capital markets management; and mergers, acquisitions, partnerships, and joint ventures.
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Amendola Communications (for Kaufman Hall)