Hospital M&A hardly has been affected by the COVID-19 pandemic

• Hospital deal volume stayed in line with recent trends for the spring quarter.
• Many large not-for-profit hospitals have continued with long-term strategies to add scale in response to market challenges.
• The increasing use of telehealth has not lessened the appeal of hospitals to buyers.

The COVID-19 pandemic has not yet had a significant affect on hospital deal-making, according to second-quarter data and insights from advisers.

Despite the massive financial hits to hospitals amid COVID-related shutdowns of elective procedures, merger-and-acquisition (M&A) activity generally continued at pre-pandemic rates.

Second-quarter hospital deals were comparable to the numbers seen in the second quarter of 2019, according to the varying definitions used by different industry trackers:

• 19 compared to 20 in the same quarter in 2019 (Hammond Hanlon Camp)
• 19 compared to 19 (Irving Levin Associates)
• 16 compared to 22 (Ponder & Co.)
• 14 compared to 19 (Kaufman Hall)

Distressed hospitals not as active as expected

The quarterly results surprised some deal watchers, who had expected the pandemic’s financial fallout to push more distressed hospitals into acquisitions.

“I’m a little surprised it isn’t higher,” said Lisa Phillips, editorial director for healthcaremanda.com, an affiliate site of Irving Levin Associates.

Distressed hospitals may have been temporarily buoyed by federal assistance related to the pandemic, said Anu Singh, managing director with Kaufman Hall. That influx of cash may have allowed them to delay seeking buyers.

Most increasingly distressed hospitals have not yet leapt at offers to be purchased, but Phillips expects such organizations to begin appearing in deals next quarter.

Conversely, Michael Tierney, a director with Hammond Hanlon Camp, was expecting a bigger decline in deals when the pandemic peaked during the spring. That did not occur likely because some hospitals in the process of being acquired could not afford to pause the deals, he said.

Tierney sees a buyer’s market developing, where hospitals looking to sell may not get their full asking price because the financial turmoil has led large health systems to become more selective with their spending.

Singh also was surprised by the strength of activity and expected an acceleration in coming quarters.

The pandemic appears not to have affected the interest of large, not-for-profit health systems in expanding their facilities.

For instance, Advocate Aurora Health, the nation’s 10th-largest not-for-profit, integrated health system, signed a nonbinding letter of intent with Michigan-based Beaumont Health to explore a merger. Advocate Aurora and Beaumont Health, which have a combined $17 billion in annual revenues, disclosed that they had initiated conversations before the pandemic began.

Additionally, distressed hospitals will be spurred to make deals when their federal assistance is depleted, and mid-tier hospitals will seek deals to fund costly COVID-19 responses, Singh said.

For-profit hospitals react in various ways

A more complicated picture has emerged for for-profit hospitals, with some systems continuing to divest facilities and others moving into expansion mode.

Nine of the 14 announced transactions identified by Kaufman Hall were acquisitions of for-profit hospitals, including six transactions involving major for-profit systems. Hospitals were divested by Community Health Systems, Quorum and HCA. Conversely, the firm identified no deals involving academic health systems or religiously affiliated organizations.

However, Singh noted that other for-profits, such as Universal Health Systems, have signaled plans to use available funds to increase their number of hospitals.

“Even though this quarter showed a few more sales than acquisitions by the for-profits, we believe that’s going to come back into equilibrium pretty soon here, as a group,” Singh said.

Bricks and mortar vs. telehealth

The historic expansion of the telehealth, including higher payments, by Medicare and commercial health plans apparently has not kept health systems from seeking to add brick-and-mortar facilities, industry advisers said. The expectation that telehealth use will remain elevated long-term and reduce the need for some physical care locations has not affected the appeal of hospitals.

“Hospitals want to be reimbursed for that work or care but as far as making facilities obsolete, that is not the current thinking,” Tierney said.

Changes brought on by telehealth have mainly affected ambulatory surgical centers and urgent care clinics, Phillips said. Changing views on care locations have led some health systems to part with such facilities but spurred other systems to add them.

The expanded use of telehealth eventually could encourage acquisitions of struggling rural hospitals because the technology would allow a purchasing health system to provide the needed medical specialists remotely, Phillips said.