More on Mergers & Acquisitions

Hospital merger and acquisition activity will remain robust throughout the year, Moody's finds

M&A activity in the health insurance sector will remain high in 2021, adding to the four significant deals that have already been announced.

Jeff Lagasse, Associate Editor

(Photo: Morsa Images/Getty Images)(Photo: Morsa Images/Getty Images)

Hospitals, health systems and providers, both for-profit and nonprofit, are expected to see continued robust merger and acquisition activity throughout the year, according to a new report from Moody's Investors Service.

Larger health systems will pursue M&A to increase market share and to diversify, in terms of both geography and service lines. Smaller providers, meanwhile, have felt the COVID-19 pandemic exact a toll on their financial performance and will likely pursue M&A to gain access to clinical, strategic and financial resources.

They'll also want to reduce labor, supply and information technology expenses, the report found.

For-profit hospitals, flush with liquidity, will focus their M&A efforts on building up capabilities in nonhospital settings in an effort to meet consumer demand.


Among large nonprofit systems, consolidation and partnerships will remain widespread. That's because scale and revenue diversification is becoming increasingly important amid a weakening payer mix, where a growing share of reimbursement comes from government insurance programs that tend to pay providers less than commercial insurers. 

An aging population will exacerbate the trend as an increasing number of older Americans shift to Medicare and, at least during the economic downturn, if unemployed consumers move to Medicaid coverage. Organic growth, though, will be limited by more and more patient care moving to lower-cost nonhospital settings, including those operated by nontraditional providers, which drives down potential reimbursement revenue.

Consolidation efforts will be driven in large part by an attraction to new markets and the desire to provide more services. This was seen recently when Virginia-based Sentara Healthcare and North Carolina's Cone health signed a letter of intent to merge. The two entities had no overlapping markets and will look to expand their reach in those two states. Likewise, Michigan-based Trinity Health recently acquired a majority stake in urgent care provider Premier Health, allowing it to increase its multi-state presence and expand its service lines.

Nonprofit health systems' revenue has steadily increased over the past decade, which Moody's attributes at least partially to consolidation. Increased scale provides large health systems with greater leverage in negotiations with payers, boosting reimbursement revenue. And the access to clinical and technological resources attracts patients for complex procedures that drive revenue.

In the next year to 18 months, M&A activity is poised to increase among for-profit hospitals, which have unprecedented levels of liquidity due to rapid cost reductions and significant CARES Act support early in the pandemic. Consolidation will be focused on enhancing services provided outside the hospital as consumers seek more access points and flexibility, said Moody's.

Some health systems opted not to accept CARES Act aid or decided to return it, signaling continued financial health during the pandemic. HCA Healthcare, for example, returned its funds, and yet liquidity improved substantially in FY20. Some CARES Act funding and assistance via federal stimulus programs will not have to be repaid.

Portions that do, such as the accelerated Medicare payments, will have to be gradually paid back over the next couple of years, which may partially moderate liquidity.


According to the report, M&A activity in the health insurance sector will remain high in 2021, adding to the four significant deals that have already been announced so far this year:

  • UnitedHealth Group's $13 billion acquisition of Change Healthcare. 
  • Centene Corp.'s $2.2 billion purchase of Magellan Health, which specializes in behavioral health. 
  • Anthem's deal for MMM Holdings, the leading Medicare Advantage plan in Puerto Rico, for an undisclosed price. 
  • Cigna's acquisition of urgent care telehealth provider MDLive, also for an undisclosed price.

The main driver for most of these deals is the desire to move beyond traditional health insurance to contain overall industry costs, which have been increasing above inflation for years. In fact, the actuaries at the Centers for Medicare and Medicaid Services expect healthcare spending by individuals to grow at an increasing rate in the coming year.

The large national health insurers will remain the industry's most likely acquirers. But the ability to partner with Big Tech or other insurers will also enable smaller insurers to gain access to industry innovations at some level.

Branded pharmaceutical companies, meanwhile, will pursue M&A to improve their diversification, accelerate top-line growth and strengthen their pipeline. On the flip side, generic drug manufacturers tend to lack the financial flexibility to make large acquisitions, limited as they are by high financial leverage and sizable litigation headaches, according to Moody's.


Mergers and acquisitions are picking back up after a tumultuous 2020, but overall M&A activity didn't take as big of a hit as revenue and operating margins. Transaction volumes were down from the norm, but only slightly, suggesting the public health crisis may be strengthening the rationale for future partnerships.

One of the reasons providers in particular choose consolidation is the belief that the patient experience will benefit as a result, but findings from January 2020 suggest this may not be the case: Research from the New England Journal of Medicine discovered that acquired hospitals actually saw a patient experience that was moderately worse, on average. What's more, 30-day mortality and readmission rates stayed largely the same at such facilities.

The only real improvement that was found among the majority of acquired entities was in the realm of clinical process, which improved modestly. But the improvement was so incremental that it couldn't be linked to the actual acquisition, and prices for commercially insured patients tended to be higher.

Twitter: @JELagasse
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