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M&A activity expected to surge as independent health systems look for partners

Even with smaller systems flooding the market, analysts warn that the financial pressures caused by COVID-19 will result in fewer potential buyers.

Because the COVID-19 pandemic has resulted in significant financial challenges for the healthcare industry, smaller independent health systems will need to pursue partnerships to survive, according to a new report from analysts at Waller and Kaufman Hall.

Much of the financial hardship that hospitals and health systems face comes from reductions in elective procedures, and, by mid-June, 26.5% of hospital systems had used more than 50% of their reserves, and another 41.1% of hospital systems had expended between 21% and 50% of their reserves, the report said.

As the year progresses, the financial future doesn't look bright, with estimates for hospital performance in Q3 and Q4 2020 indicating declines in operating margins by as much as 11%, according to the report.

With many health systems preoccupied with managing the financial and operational struggles caused by the pandemic, the report shows that merger and acquisition activity for Q2 2020 was the lowest it's been in five years.

The analysts predict that the pent-up M&A activity from the pandemic will "very likely" cause a surge of hospital M&As moving into 2021.

"We foresee an increase in the number of independent hospitals and smaller systems that will need to explore partnerships in order to ensure the continued delivery of quality healthcare to the organizations' communities," the report said.

However, even with smaller systems flooding the market, the analysts warn that the financial pressures caused by COVID-19 will result in fewer potential buyers.


The report insists that executive leadership teams take a hard look at their real operational and financial performance when planning for the future.

While some hospitals have managed to remain independent from their inception, the new reality is "continued independence comes at the cost of diminished quality of care, services and expertise, or in some cases, closure," the report said.

Independent hospitals may also have to take actions such as reducing or eliminating service lines, cutting back the workforce, cutting expenses and backing out of capital investments.


Larger systems are better prepared for the future. These are the ones that typically have access to capital, scale, vertically-integrated services and adaptability that make them more likely to achieve growth.

Even though larger systems are often in better positions than independent systems, they should still undertake analyses of their growth goals. This will help them identify potential partners to help achieve those goals, especially for those seeking ways to vertically integrate.

"Areas such as telehealth, behavioral health, home health and long-term care, among others, are on the wish list of many large health systems seeking to provide a broader continuum of care while reducing the rate of readmissions in their hospitals," the report said.


The federal government has set aside $175 billion for hospitals and other providers through the Coronavirus Aid, Relief, and Economic Security Act and the Paycheck Protection Program and Health Care Enhancement Act, to be distributed through the Provider Relief Fund.

The Department of Health and Human Services has already announced allocation payments for Phase 1 and Phase 2 general distributions, which include: Medicare, Medicaid, CHIP and dental providers and targeted allocations to high-impact areas, safety-net hospitals, rural providers, tribal facilities, clinics, urban health centers, and skilled nursing facilities.

But many hospitals remain in a dire financial position. Doctors, nurses and hospitals have asked Congress to provide an additional $100 billion in relief to frontline healthcare workers to offset staffing and equipment expenses related to the COVID-19 pandemic.

When asking for more aid, organizations cite the financial impact hospitals are going through, like Kaufman Hall's new National Hospital Flash Report for July that shows hospital operating margins have plunged 96% since the start of 2020, in comparison with the first seven months of 2019.


"Despite these headwinds, health systems large and small are displaying an admirable level of focus, perseverance and dedication to their communities," the report said. "A spirit of collaboration, even amongst parties that were formerly fierce competitors, has emerged as health systems have been reminded that all are committed to the common goal of keeping their communities safe and healthy. If one positive is to emerge from the pandemic, it is perhaps this banding together, both within and between health systems."

Twitter: @HackettMallory
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