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COVID-19 spurs rise in hospital mega mergers, finds Kaufman Hall

Average seller size by revenue was $676 million, well above historical averages for the first quarter and for recent year-end averages.

Jeff Lagasse, Associate Editor

(Photo by Martin Barraud/Getty Images)(Photo by Martin Barraud/Getty Images)

The number of hospital and health system mergers and acquisitions saw a sharp decline in the first quarter of the year, but the average transaction size soared, finds new analysis from industry consultant Kaufman Hall. This trend is a reversal from Q1 2020, when COVID-19 first began to take hold in the U.S.

In total, there were 13 announced deals in Q1 2021, compared to 29 in 2020.

Average seller size by revenue was $676 million due to a pandemic-induced rise in "mega mergers" (involving two companies with over one billion dollars in annual revenue) and transactions with seller revenues between $500 million and $1 billion. The scale of Q1 transactions led to a high number of hospital facilities, 72 total, included in the announced deals.

There were a number of notable transactions recorded in the first quarter. OU Health, for example, signed a letter of intent to merge with the University of Oklahoma College of Medicine to create a fully integrated academic health system. And CommonSpirit Health announced the planned sale of 14 hospitals in North Dakota and Minnesota to Essentia Health – one tertiary hospital in Bismarck, North Dakota, and 13 critical access hospitals.

Meanwhile, UK HealthCare and King's Daughters Health System announced a joint-venture partnership that will expand access to tertiary-level services for residents of eastern Kentucky and southern Ohio. And Aspirus Health announced its plan to acquire seven hospitals in central and northern Wisconsin from Ascension Health.

Average seller size by revenue for Q1 2021, $676 million, is well above historical averages for the first quarter and for recent year-end averages, and is the third highest quarterly figure Kaufman Hall has recorded in the past decade. The average size of the quarter's transactions is also reflected in total transacted revenue for the quarter, which at $8.8 billion is second only to Q1 2018 among historical first-quarter figures.

For-profit health systems were the acquirer in two of the 13 announced transactions, academics were the acquirer in three, and religiously sponsored systems were the acquirer in two. Other not-for-profit systems were the acquirer in the remaining six transactions.

WHAT'S THE IMPACT?

The COVID-19 pandemic has affirmed the importance of transformation and again validated the pursuit of scale.

Organizations are seeing new value in diversification, whether across markets or revenue sources. LifePoint's reported pursuit of Ardent Health Services would add more densely populated suburban and urban markets in New Mexico, Oklahoma and Texas to LifePoint's existing, rural-focused portfolio. In this and similar cases the market activity involves partnerships with health systems that have an established presence in their local markets.

The decision to partner with health systems that have an established market presence remains a key driver, as another emerging trend is the significance of local market knowledge. While smaller health systems may not have the financial scale of larger multi-state systems, they may have intellectual bandwidth and an understanding of local issues that can be significant advantages. Partnering with these systems can leverage their knowledge and facilitate growth within local markets.

CommonSpirit's and Ascension's transfer of assets to local systems in the upper Midwest ensures the continued vitality of these assets under the management of a more focused and regionally driven operator, the report said. This also allows larger systems with a national presence to reallocate their time, capital and resources to markets they deem essential to their organization's future success.

THE LARGER TREND

While Q2 data from this year is still incomplete, the second quarter of 2020 saw a slight dip in transaction numbers, with 14 recorded transactions in Q2 2020 as compared to 19 in the same period in 2019. 

For Q2 2020, the aggregate transaction value was $12.26 billion, compared to $29.31 billion in Q1 and $137.29 billion in the second quarter of 2019. Until June 30, the value of global healthcare M&A was $37.68 billion for 903 deals.

Since 2015, global healthcare M&A value has increased in every year except 2017, according to S&P Global.

Kaufman Hall anticipates that COVID-19's impact will continue to influence partnership, merger and acquisition activity through the remaining quarters of the year.
 

Twitter: @JELagasse
Email the writer: jeff.lagasse@himssmedia.com