Hospital Q3 Deals Active, But Off Recent Highs

Amid a number of high-dollar deals, the average revenue and bed count per hospital transaction were larger than one firm has seen since it started tracking deals in 2009.

Nov. 6—Hospital mergers and acquisitions (M&A) continued to set an aggressive pace in the third quarter of 2018, according to several tracking firms. However, the rate of deals was not this year’s fastest.

As was typical among tracking firms, Ponder identified 25 announced transactions in the third quarter. That was an increase from 22 in the preceding quarter but far below the 36 transactions announced in the first quarter of the year.

“However, Q3 activity does not represent a precipitous decline,” Ponder noted. “Annualized volume for the first three quarters equals approximately 114 transactions, just behind 2017’s total. In summary, volume is steady although not increasing.”

A Kaufman, Hall & Associates analysis identified 18 transactions in the third quarter, marking a 38 percent decrease from the 29 deals recorded in the third quarter of 2017. Year-to-date transactions for 2018 totaled 68, according to Kaufman Hall, compared to 87 through the third quarter of 2017.

“While there is a moderate drop in M&A activity, we are continuing to see providers engage in larger, more strategic partnerships needed to develop, access, or combine the resources required to transform legacy business models and support innovation,” said Anu Singh, managing director at Kaufman Hall. “We expect to continue to see large-scale organizations pursue partnerships because they realize that while their ability to remain independent may exist, the path to long-term relevance and growth may require broader partnerships and collaborations.”

A HealthcareMandA.com report identified 15 deals worth a total of nearly $8.2 billion. The number of hospital acquisitions was equal to the number announced in the second quarter but slightly down from 17 in the third quarter a year ago. It also was a sharp decline from the 26 deals identified in the first quarter of 2018.

Why the Decline?

The steep drop-off from the beginning of the year, according to HealthcareMandA.com, stemmed from the end of announced divestitures by some for-profit chains, particularly Community Health Systems (CHS) and its spinoff, Quorum Healthcare.

Along with Tenet Healthcare, those companies spent the previous six quarters selling off assets that were underperforming or in non-core markets, according to the firm.

CHS divested 30 hospitals in 2017. In July 2018, it announced plans to sell two of its Arkansas hospitals—the Sparks Health System—to not-for-profit Baptist Health in Little Rock. CHS characterized these sales as helping to strengthen its portfolio.

A $5.6 billion acquisition of LifePoint Health was announced in the third quarter by RCCH HealthCare Partners, which took the publicly traded chain private. The result left HCA Healthcare as the only publicly traded hospital chain still making acquisitions. 

Ponder noted that the third quarter was the second consecutive in which no publicly traded for-profit health system announced an acquisition of a not-for-profit health system.

“Following eight years of increasing M&A activity, we are seeing that for-profit and nonprofit systems, which often grew rapidly and opportunistically, are reevaluating which markets are the ones where there is a strong strategic rationale to remain,” Kaufman Hall’s Singh said.

The quarter also saw an example of “alternative transaction models” in the cooperative approach by Evangelical Community Hospital and Geisinger, noted Kaufman Hall. That deal will allow Evangelical to remain an independent community hospital while each party invests $265 million over the next five years in their shared service areas. Evangelical will benefit from Geisinger’s IT innovations and from improved status in the system’s health plan.

Ponder identified joint ventures or joint operating agreements in five, or 20 percent, of the quarter’s transactions. Academic medical centers were participants in 28 percent of the transactions, which was their greatest share of M&A activity since the fourth quarter of 2017, when they were involved in 31 percent.

High-Dollar Deals

The average revenue and bed count per transaction in the quarter reached beyond any level Ponder has seen since it started its deal tracker in 2009.

Five large transactions in the quarter (involving Bon Secours-Mercy Health, Einstein-Jefferson, M Health-Fairview Health Services, Rutgers-RWJBarnabas, and LifePoint-RCCH) each had target systems with revenue in excess of $1 billion. That was the largest number of hospital deals to clear that threshold since Ponder began its tracking.

A PwC report noted that the RCCH HealthCare Partners acquisition of LifePoint Health Inc., which operates primarily non-urban hospitals and facilities, was worth approximately $5.6 billion and qualified as the first megadeal in the hospital subsector since the third quarter of 2016 (PwC defines megadeal as a transaction exceeding $5 billion).

Other SubSectors

PwC noted that the hospital subsector had the highest deal value among all healthcare subsectors during the quarter. The total spent on such deals—$8.2 billion—was 51 percent of the total deal value in health care.

Long-term care was the third largest subsector by deal value, trailing hospitals and “other,” and remained the most active subsector with 102 deals, or 39 percent of deal volume, according to PwC. That volume continued a trend seen in recent years.

In terms of deal volume, behavioral care increased the most from the previous quarter, at 66.7 percent.

In value terms, hospitals and behavioral care increased the most from the preceding quarter at 4,710.8 percent and 343.6 percent, respectively.

Meanwhile, a notable decline—by deal volume—occurred in rehabilitation, which dropped by 70.6 percent. The greatest declines by deal value occurred among physician medical groups and managed care, at 97.2 percent and 94.8 percent, respectively. However, in each of the latter subsectors, only one deal’s value was disclosed.

Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare