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Most hospital M&A transactions are financially unsuccessful, study says

According to a recent study, a majority of hospital and health system merger and acquisition transactions have not been financially successful.

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Booz & Company, a global management consulting firm, analyzed a sample of 220 hospitals with pre- and post-transaction performance data over a 10-year period (between 1998 and 2008) and found that less than half (41 percent) of all acquired hospitals outperformed their market.

Sanjay Saxena, co-leader of Booz & Company’s North American Hospital & Health Systems Practice based in San Francisco, said that the studied sample of hospitals represents 40 percent of the total transaction volume in the 10-year period, and that Booz calculated change in operating income and operating margin for each acquired hospital over a five-year period – two years prior to the transaction and two years post-transaction.

Saxena added that 18 percent of the acquired hospitals went from positive margins before the deal to negative margins two years after the deal. Booz found that acquisition combinations involving academic medical centers had significantly lower outperformance rates versus all transactions that occurred. Also, hospitals acquired by large systems (15 or more hospitals) had a 51 percent outperformance rate compared to a 34 percent rate for hospitals acquired by smaller systems (fewer than 15 hospitals).

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Booz & Company's study also sought to learn what made M&A transactions successful, said Saxena.

“When we looked at successful transactions, one thing we found consistently was that there was a coherence in terms of the capabilities the entities had so when the two came together what they were able to offer was distinctive and differentiated, and allowed them to go in and be successful in the marketplace,” he said.

Sanjay suggested that it’s important for hospitals to merge with other hospitals that have like-minded views about the future and culture, as well as shared views around their positioning in the market.

So, for example, a merger between an academic medical center and a small, community hospital in an underserved area may not be ideal.

“The things that make you a successful academic medical center are not the same things that are successful in a community health center where cost structure is very important, whereas at an academic center, research and teaching is important. It would make it hard to realize value from a transaction like this,” he said.

“This is not to say that all acquisitions involving hospitals with different views and positions in the market will fail," he added, "but those are the hardest ones to realize and completely get value from. However, there always has to be a real market or strategic rationale for the transaction, and it has to be clear for both parties up front, whether the hospitals serve the same types of populations or not.”


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