Hospital M&A activity was low in Q1 2021 but could increase soon

• Hospital M&A tracking firms reported low volumes in the first quarter of 2021 but also saw indications that the lessons of the COVID-19 pandemic will drive higher levels of activity.
• Independent hospitals were involved in more transactions in the recent quarter than they were at this time a year ago.
• For-profit divestitures of hospitals were lower in number and may not rebound in the near term.

When reporting on hospital mergers and acquisitions for the first quarter of 2021, tracking firms found sluggish volume but also signs that hospitals are strategizing for the projected end of the COVID-19 pandemic.

For example, Kaufman Hall reported only 13 transactions, fewer than half the number in Q1 2020. But the transactions that happened were more robust by some measures.

“One year ago, Q1 2020 was closing with an emerging awareness of the pandemic that was about to occur,” according to Kaufman Hall’s quarterly report. “The quarter ended with a relatively high number of announced transactions but with very few large transactions, leaving average seller size by revenue at just $172 million for the quarter.

“This year, however, as the pandemic seems closer to being contained, the reverse is true. The number of transactions is down in Q1 2021, but the average size of those transactions is significantly larger.”

Among the 13 transactions, average seller size was $676 million. That value is the third-highest Kaufman Hall has tracked for any quarter over the past 10 years (although the highest average, $800 million, was seen in Q2 2020 — well into the pandemic).

Ponder & Co. reported 20 transactions, equal to the number in Q1 2020 but lower than the first-quarter average over the past decade. However, the firm “believes discussions among health systems are on the rise as we begin to see the light at the end of the tunnel with COVID.”

Deals in the most recent quarter were topped by the merger between Lifespan Health and Care New England, with Brown University also investing in the newly integrated academic health system. That was the lone transaction in which the target entity (Care New England) had revenues surpassing $1 billion, Ponder reported.

Activity picks up for independent hospitals

Although volume remained unchanged year-over-year, Ponder reported, the composition of participating hospitals was different. The number of independent hospitals announcing change-of-control transactions increased from four in Q1 2020 to nine this past quarter.

In turn, the number of transactions involving either for-profit divestitures or member hospitals of not-for-profit systems decreased from 16 in Q1 2020 to seven in Q1 2021.

For-profit acquisition activity especially slowed, representing only 10% of the announced transactions in the recent quarter. That’s down from 40% in Q1 2019, Ponder reported. “It’s unclear how quickly this will rebound in light of a number of factors, including continued integration of major mergers, rumors regarding LifePoint and Ardent and continued delevering at Community Health. Also, many of the for-profit systems are focused on non-acute plays.”

Upcoming quarters likely will be busier

Both Ponder and Kaufman Hall anticipate increasing levels of activity during the remainder of the year.

“After focusing on the pandemic for the past year, systems will need to again focus on the core needs of lowering cost and driving top-line growth,” Ponder’s report states, adding that “the long-term drivers of consolidation will come back into focus and drive increased activity over the medium term.”

Kaufman Hall predicts that the events of the past year will shape strategic planning in the months ahead.

“The COVID-19 pandemic has affirmed the importance of transformation and again validated the pursuits of scale, relevance and intellectual capital that remain evident in nearly all this quarter’s transactions,” the report states. “Organizations are seeing new value in diversification, whether that be across markets or revenue sources.”