‘Staggering’ increase seen in scale of healthcare mergers in 2017

2017 will go down as the year mergers and acquisitions activity “shook the healthcare landscape,” according to a report from Kaufman Hall, with more deals worth $1 billion or more being announced than in any prior year.

Overall, M&A activity went up 13 percent compared to 2016 with 115 total transactions. Eleven of those deals involved sellers with net revenues of $1 billion or greater, along with 16 more in the $500 million to $1 billion range. The largest traditional deal announced was the merger of Dignity Health and Catholic Health Initiatives, which would create a $28 billion, 109-hospital system.

Almost half (47 percent) of all deals involved combined revenues of $100 million or more. The aggregated revenue of organizations in these deals totaled $63.2 billion, nearly double 2015’s combined value of $32 billion, even though the two years saw a similar number of transactions (115 in 2017 and 112 in 2015).

“You can’t be too big to compete in today’s developing healthcare market,” Kaufman Hall chair Ken Kaufman said in the report.

Consolidation was most pronounced in Pennsylvania, Georgia and Texas, which, respectively, saw 14, nine and eight transactions in 2017.

Not only did the scale and sheer number of transaction change, but so did the type of companies involved. For-profit systems like Community Health Systems (CHS) and Tenet Healthcare accounted for 32 percent of all sales, but the buyers with largely nonprofits rather than other for-profit systems.

Then there were the deals which signal a much greater shift in the healthcare landscape. Non-providers began moving into the industry, most notably the many maneuvers of UnitedHealthcare’s Optum unit and the $69 billion purchase of Aetna by CVS Health. Much of this activity occurred in the final quarter of 2017, making an already busier year for M&A a historic one.

For 2018, Kaufman Hall managing director Anu Singh expects to see more of these transactions, including the entrance of tech giants like Apple and Amazon.

“Innovative companies will be looking to focus on one or more segments of the healthcare space where they can deliver a more optimal product or service than exists today,” he said is a press release. “Disruption is guaranteed if they do. These companies have achieved scale and are looking to apply this competitive advantage to a traditional industry. They are ready to bring innovation quickly, and consumers are apt to see this distinction.”

In the coming year, the report expected both continuing transformation and “reactionary responses to epic levels of disruption.” More national “mega-deals” and bigger interstate regional consolidation will come, Kaufman Hall predicted. The entrance of non-providers into the space will also attract new capital, as well as a need for these ever-growing health systems to justify their portfolios.