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Report: Hospital M&A Activity Hit Record-Breaking Pace in 2017

January 31, 2018
by Heather Landi
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Healthcare provider mergers and acquisitions hit a record-breaking pace in 2017, with hospital and health system transactions announced in 2017 totaling 115, up 13 percent over 2016 and the highest number recorded in recent history, according to a new report.

In its latest healthcare M&A report, Kaufman Hall, a management consulting firm, reports that deals are increasing in value as well as volume, with 11 transactions involving sellers with net revenues of $1 billion or greater, the highest number of mega-deals ever recorded.

The largest regional health system transaction announced was the merger of Advocate Health Care and Aurora Health Care, which would have combined revenue of nearly $11 billion and create the 10th largest not-for-profit hospital system in the country. Dignity Health and Catholic Health Initiatives signed an agreement in late 2017. With more than $27 billion in annual revenues, this combined organization will be the largest not-for-profit health system in the country, and, based on revenue size, would be larger than most publicly traded players, the report notes. And in August, Carolinas HealthCare System and UNC Health Care announced their intention to create one of the country’s leading not-for-profit health systems by combining UNC’s highly regarded academic medical center with Carolinas’ large, comprehensive delivery system.

What’s more, in July, Beth Israel Deaconess and Lahey Health, along with three Massachusetts community hospitals, signed a definitive agreement to merge. While the deal is pending regulatory approval, if successful, the combined organization would generate more than $5 billion in revenues. It would be the second largest health system in the state behind Boston-based Partners HealthCare.

Pennsylvania (14 deals), Georgia (nine deals), and Texas (eight deals) were the most active states in terms of mergers and acquisitions in 2017.

The report, titled “2017 in Review: The Year M&A Shook the Healthcare Landscape,” also notes the trend of an increasing number of smaller, but still large transactions that also occurred in 2017 among providers with revenue between $500 million and $1 billion. In 2017, 16 transactions involved hospitals and systems in this size range compared to just one in 2009. In addition, the total number of transactions in 2015 and 2017 was roughly the same at 112 and 115, but the aggregated revenue of transacted organizations in 2017 ($63.2 billion), was roughly double that of 2015 ($32 billion), the report states.

The pace of healthcare deals signals big changes ahead, the report authors state. “The implications reach far beyond the unprecedented number of individual transactions. Organizational size and scale have mattered for decades—but today, they are proving to be imperatives. Transactions have moved from a heavy financial rationale to a more strategic one, with higher-rated organizations now scaling up at a pace and level that exceeds the steady activity involving smaller and more vulnerable providers,” the report authors wrote.

What’s more, intellectual capital, brand and presence, network infrastructure, risk-bearing capabilities, care continuum, clinical and business intelligence, consumerism, capital resources, and diversified operations represent the most frequently cited benefits of these transformative partnerships.

“We were not surprised at the trends that emerged in 2017. Providers have been repositioning over the past decade and trying to grow, diversify, and fill strategic gaps. The recent uptick in the scale of partnerships is quite staggering,” Anu Singh, Kaufman Hall managing director said in a statement. “The size, magnitude, and complexity of these deals has reached a new level. It’s telling us that providers are reacting and responding to industry transformation by creating wider and deeper enterprises that can thrive in the face of disruption because they include physician alignment, broader base and type of care sites, and a full care continuum – all with access, relevance, and convenience for the consumer.”

A notable trend emerged among for-profit and not-for-profit providers in 2017. Thirty-two percent of 2017 sales transactions involved for-profit divestitures, primarily driven by Community Health Systems (10 transactions including 23 hospitals), Quorum (six transactions including eight hospitals), and Tenet (three transactions including seven hospitals).

However, unlike previous years, not-for-profit organizations are stepping up as purchasers of these assets. In 2017, more transactions occurred with not-for-profits purchasing for-profit assets than for-profit organizations buying assets from their for-profit peers, which has not happened in the last several years, according to the report.

The announcement of pivotal mega deals, such as CVS and Aetna, demonstrate how non-provider entities are moving aggressively into the provider space made vulnerable by high costs, low value, and lack of consumer focus.

“There is a strong likelihood that we will see new entrants on the scene in 2018, such as Amazon’s foray into pharmaceuticals. Innovative companies will be looking to focus on one or more segments of the healthcare space where they can deliver a more optimal product or service than exists today. Disruption is guaranteed if they do. These companies have achieved scale and are looking to apply this competitive advantage to a traditional industry. They are ready to bring innovation quickly, and consumers are apt to see this distinction,” Singh said.

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