Healthcare M&A update: A quiet 2021 could give way to strategic shifts in 2022

• The year 2021 was one of the least busy on record for healthcare mergers and acquisitions.
• Organizations increasingly are looking to combine resources in pursuit of industry transformation rather than to merely expand their footprint.
• Private-equity companies and regulatory agencies will continue to have an impact in the healthcare M&A space.
• Activity is expected to pick up this year, even if the higher volume doesn’t show up in official counts.

The past year was low-key for hospital and health system merger-and-acquisition (M&A) activity amid the COVID-19 pandemic, albeit with a number of noteworthy deals and indications of long-term strategic shifts.

“If I had to sum [the year] up in a single word, I would say distractions,” said Rich Bayman, senior vice president and managing director with H2C.

Hospitals and health systems have been dealing with all-consuming issues that include acute labor shortages and associated surges in costs. Plotting an expansion into new markets or new verticals thus has taken a backseat for many organizations. In addition, federal cash infusions and favorable equity and bond markets have kept organizations on relatively stable ground.

Considering those factors, it’s no surprise that H2C reported a 33% year-over-year decrease in transaction activity, with volumes finishing the year 36% below historical averages and at their lowest levels in a decade. Kaufman Hall reported 49 transactions for the year — 30 below the reported number for 2020, which easily had been the lowest total of the preceding decade.

“What we’re still seeing is the numbers probably impacted by a reallocation of resources and a focus on the here-and-now,” said Anu Singh, leader of Kaufman Hall’s Mergers, Acquisitions and Partnerships practice.

Big deals still took place

Kaufman Hall nonetheless reported eight “mega-mergers,” meaning deals in which the seller or smaller party had more than $1 billion in annual revenue . Average revenue of smaller entities was $619 million, up by $231 million from 2020.

Based on the typical time frame for health system transactions, some of those massive deals may have been initiated before the pandemic. Still, the trend indicates that at least some organizations have room to think strategically about their place in their market and the industry.

On one hand, organizations appear to be sharpening their focus on their core assets and markets. For example, Steward Health Care in 2021 completed the purchase of five hospitals and associated physician practices in South Florida from Tenet Healthcare for around $1.1 billion. “The acquisition doubled the size of Steward’s presence in Florida,” Kaufman Hall reported.

At the same time, Singh thinks the pandemic illustrates the value of combining resources to take on industry transformation.

Organizations in that scenario start by considering their strengths and then assess what elements should be added to enhance their position, Singh said. The next step is “asking the very difficult question of, ‘Can we do that ourselves? Or could we get there faster, get there better, get there on a more risk-mitigated basis with the help of someone else?’”

An example cited in Kaufman Hall’s report was the merger agreement between Intermountain Healthcare and SCL Health, with Intermountain seeking to expand its population health capabilities across a broader geography by incorporating SCL’s expertise in operating a multistate system.

Private-equity companies make their presence felt

Aside from the pandemic, X-factors in the M&A forecast include private equity and regulation.

Private-equity healthcare activity was “on fire over the last 18 months,” Bayman said, driven by low interest rates. But the impact specifically in the hospital and health system market has been muted and likely will remain that way.

Although a recent study (login required) in Health Affairs highlighted the strong baseline financial performance and moderate local market power of private equity-acquired hospitals, the economics of the sector make most facilities less appealing as targets.

“You’re not going to see local community hospitals or regional systems do a leveraged buyout,” Bayman said.

“The better assets aren’t available,” he added. “You’re fishing in a pond where you’re not a market leader typically, and you can’t get concentration. They don’t lend themselves to good platforms, but they’re capital-intensive, labor-intensive, low-return, highly regulated.”

Hospitals probably will partner with private equity on ancillary aspects of care but not on anything involving core operations. Private equity is more likely to expand its presence in markets such as post-acute care and physician practices, including both specialty groups and primary care.

Telehealth and remote patient monitoring are among the areas attracting investor attention, Bayman said. “The health systems will be consumers of that stuff. I’m not sure they’re going to be owners of that stuff.”

Regulators prepare to ramp up scrutiny

The regulatory picture bears watching in the aftermath of a White House executive order issued in July to promote competition across industries. In a section on healthcare, President Joe Biden directed the Department of Justice and Federal Trade Commission to review and revise their merger guidelines for hospitals.

Bayman said questions about regulatory oversight are among the first that get asked when prospective partners start to mull the benefits of a union.

“It’s shrinking the buyer universe,” he said.

But Singh isn’t sure any forthcoming changes will make a big impact.

“I personally feel that the regulatory scrutiny already was very high,” he said.

In addition, the evolving nature of transactions involving larger systems may render concerns about market concentration moot in some cases.

“There is a lot more going on around trying to get access to intellectual capital and know-how and expertise than there is those traditional views of scale that might have been used in the past,” Singh said. “When we’re looking at two large organizations coming together, we are far more focused on what’s the clinical and business intelligence model going forward that’s going to transform care.”

A 2021 example of such a scenario was the agreement between University Health Care System in Augusta, Georgia, and Atlanta-based Piedmont Healthcare. The parties seek to enhance the “clinical capabilities, expertise and coordination” of care that University Health Care provides to Augusta-area residents, Kaufman Hall reported.

The short-term forecast looks eventful

It’s hard to predict what will happen in 2022 without knowing the future course of the pandemic. But experts generally foresee a pickup in activity. Among other reasons, the financial pressure on some organizations will intensify as CARES Act funding potentially dries up and settlement of Medicare advance payments continues.

“We do think you’re going to see more merger-of-equals-type scenarios,” Bayman said, citing the union of Spectrum Health and Beaumont Health in Michigan as a recent example.

However, a busier M&A landscape may not manifest in deal volume over the next year.

“M&A is not quick,” Bayman said. “We tell clients if you’re doing it quickly, it’s nine months, but more likely it’s 12 to 15 from start to finish.

“We think that activity is going to pick up in 2022, but it won’t bear out in the numbers when you look at announced and closed deals really until 2023.”