Hospitals and health systems have undergone extreme financial pressure in the past couple years, and this issue is being reflected in the sector’s M&A activity, according to a new report from Kaufman Hall.
The report pointed out that hospitals’ median operating margins were in the red for all of 2022. Things have gotten better this year, and 2023 will likely end as a much more stable year for hospital finance than last year. However, hospitals’ year-to-date median operating margins are now hovering at just slightly above 1%. While this is an improvement from last year, this figure is still below the 3% or higher margin required for long-term financial sustainability, the report noted.
These financial pressures are apparent in a striking metric that Kaufman Hall uncovered in its report, which analyzed the third quarter’s M&A activity among hospitals and health systems. It found that financial distress was the driving factor behind nearly 40% of deals announced during Q3. This figure is well above historical benchmarks, Kaufman Hall’s analysts pointed out.
The report also showed that hospital M&A activity has been returning to pre-pandemic levels this year, and the Q3 was no exception. There were 18 M&A transactions announced during Q3, compared to seven in Q3 2021 and 10 in Q3 of last year. The reason why M&A activity is regaining its momentum is because hospitals are seeking out partnerships to grow and protect their long-term financial sustainability, according to the report.
Q3’s 18 M&A deals resulted in a total transacted revenue of $8.2 billion. This figure is significantly lower than the $13.3 billion in total transacted revenue recorded in Q2, but Q2 saw three mega mergers, which refers to a deal in which the smaller party’s annual revenue exceeds $1 billion. There was only one mega merger announced in Q3 — the planned combination of Oregon Health & Science University and Legacy Health.
In Q3, the average annual revenue of the smaller party (also referred to as the seller) was $453 million. When removing the mega merger deals from both Q2 and Q3 of this year, the average party’s revenue in Q3 was actually much higher than that of Q2, at $243 million and $159 million respectively. This represents a noticeable increase in M&A activity among sizable independent hospitals looking to combine with larger organizations, according to the report.
Nonprofit health systems were the larger party in 14 of Q3’s 18 deals, with seven being academic/university-affiliated health systems. The report pointed out that patient volumes have been returning to pre-pandemic levels more quickly at academic health centers than they have at other acute care hospitals. The median inpatient occupancy rate is 70% at academic health centers, compared to 53% at acute care hospitals generally, it said.
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