Hospital, health system model changes drove M&A in 2019

Changing models across hospitals and health systems helped drive mergers and acquisition activity in 2019, according to a new report from Kaufman Hall.

The top three pressures on hospitals and health systems to transform included new entrants in the healthcare marketplace, consumers demand and preferences, changing regulations and legacy provider issues the report concluded.

The average size of seller by annual revenue dropped $409 million in 2018––a historic high––to $278 million in 2019. However, the number of deals was up slightly––92 in 2019 compared to 90 in 2018. During the year there were also three mega-merger transactions, where the smaller partner had more than $1 billion in annual revenue. There were also 11 transactions where the small partner had annual revenues between $500 million and $1 billion.

Not-for-profits were the most active acquirers in 2019, making up 80% of transactions in 2019. There were also four cross-state transactions during the year, as health systems sought new growth opportunities, diversification of bases of operations and find other operational complements.

While many areas of M&A in 2019 were similar to 2018, health systems and hospitals looked for ways to transform their operations via transactions, including across state lines. The transactions throughout the year were also more diverse in in form and the partnerships amid increasing competition.

"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," Anu Singh, managing director at Kaufman Hall, said in a statement "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.

Specifically, health systems sought out new partnerships with physician practices that are innovating to meet consumer demands such as at-home visits and other on-demand services. Digital health companies were also among partners for health systems, bringing new technology related to scheduling and virtual care to meet consumer preferences.

Other transactions were focused on expanding the care continuum with more services, such as home health, behavioral health and laboratory services. Many of the trends are expected to continue into 2020.

“The transactions we're seeing, for the most part, are being driven more by strategic considerations than purely financial concerns,” Singh said. “It's a trend we expect to see continue in 2020, and also accelerate in terms of more cross-vertical partnership activity."