Atrium headquarters in Charlotte, NC (Google Earth)
The total number of transactions involving hospitals and health systems dropped in the second quarter of 2019, but the size of the mergers and acquisitions announced pushed total transacted revenue to its highest levels since 2017. Those are among the findings of the Q2 2019 M&A Activity Report from Kaufman Hall.
Although the volume of announced transactions dropped to 19 in Q2 from 27 in Q1, quarterly volume was in line with recent trends, including the 21 transactions announced in Q2 2018. The volume of transactions from the beginning of the year also is in line with 2018, with 46 announced transactions in the first half of this year versus 50 in the first half of 2018.
Where Q2 2019 deviates significantly is in total transacted revenue, which was $11.3 billion. That figure is significantly above the norm for a single quarter, nearly four times the revenue of Q2 2018, and just shy of 2017's historically high figure of $12.6 billion for Q2. The average size of the seller by revenue also grew substantially, from $196 million in Q1 to approximately $597 million in Q2.
WHAT'S THE IMPACT
The numbers for the quarter show the furthering of a trend toward mega-mergers, a shift researchers expect will continue into the future. Driven in part by hospitals and health systems assuming more risk, uncertainty permeates the industry, with vulnerable organizations seeking alignment with more sustainable platforms. Stronger organizations are attracted to new revenue streams and expansion into new regions. M&A has proven helpful for both groups.
A significant number of the transactions announced in Q2 2019 were divestitures -- the sale of one or more hospitals from one health system or hospital operator to another, including the sale of minority interests. Divestitures represented about 40% of the announced transactions. The majority of the divestitures, five out of seven, were made by for-profit health systems or hospital operators.
One of the most noteworthy transactions in Q2 was the April announcement of the acquisition of Wake Forest Baptist Health in North Carolina by Atrium Health. Among the benefits are the addition of an academic medical center to Atrium Health's growing regional health system, which expanded from the Carolinas into Georgia with the acquisition of Navicent Health in 2018. Wake Forest's seven hospitals will join Atrium Health's 42 existing hospitals, creating a health system with combined annual operating revenue of more than $9 billion.
Another large transaction, announced in May, will bring together two health systems that are geographically contiguous -- Gundersen Health System and Marshfield Clinic Health System -- but have little overlap in their existing markets. The two integrated delivery systems will stretch from southwestern to north central Wisconsin, with additional locations in northeastern Iowa and southeastern Minnesota. The organizations have said they believe this transaction can help them become the preeminent rural healthcare organization in the country.
Finally, in June, Sanford Health and UnityPoint Health announced they had signed a letter of intent to explore a merger. If it moves forward, the combined system would have more than $11 billion in annual operating revenue and would rank among the 15 largest nonprofit health systems in the country. Most of the two systems' hospitals are located in North and South Dakota, Iowa, Minnesota, Wisconsin and Illinois, but Sanford's acquisition of Evangelical Lutheran Good Samaritan Society, which closed in January 2019, gives it a presence in 26 states.
WHAT ELSE YOU SHOULD KNOW
Academic medical centers were acquirers in three of the 19 transactions announced in the first quarter. Religiously affiliated health systems accounted for another three. Two of the sellers in these transactions were non-affiliated, for-profit hospital operators, and one was a religiously affiliated health system. For-profit systems were acquirers in two of the 19 announced transactions.
THE LARGER TREND
The trend toward mega-mergers was evident even in January, when Kaufman Hall noted that the average size in revenue of sellers in 2018 -- defined as the smaller of two organizations in a transaction -- reached $409 million.
That's the highest figure seen since Kaufman Hall began tracking this metric in 2008. It also represents a compound annual growth rate of almost 14 percent in the average size of sellers by revenue since 2008.