M&A trend: More acquisitions of small or ‘distressed’ hospitals

• Hospital transaction volume for 2019 was comparable to the level at this point in 2018.
• Deal volume in 2019 was driven by a surge in the sale of financially distressed hospitals.
• Smaller hospitals also comprised a larger share of 2019 acquisition targets.

Hospital acquisitions ticked up in the third quarter of the year, and smaller or “distressed” hospitals increasingly were targets, according to tracking firms.

Hospital merger-and-acquisition (M&A) activity accelerated in the latest quarter, which returned the overall volume of deals in 2019 to that seen in previous years, according to several tracking firms.

Hospital deal volume reports differed based on the methodology used by different firms, but reported year-to-date total deals included:

• 61 announced transactions vs. 68 at this point in 2018 (Hammond Hanlon Camp LLC)
• 71 announced transactions vs. 68 at this point in 2018 (Kaufman Hall)
• 62 transactions vs. 92 at this point in 2018 (Ponder and Co.)
• 70 definitive-agreement-stage or closed transactions vs. 61 at this point in 2018 (Irving Levin Associates)

Why distressed hospitals are becoming more frequent targets

A recent trend has been the increasing number of deals involving financially “distressed” hospitals, analysts said.

Irving Levin found that deals involving hospitals with net income losses increased 30 percent from this point in 2018 to total 16 of the deals thus far in 2019.

“There’s still distressed activity happening throughout the market, but in this quarter, this year, it’s been greater than before,” Mike Tierney a director for Hammond Hanlon Camp LLC (H2C), said in an interview. “You’re seeing hospital systems that are finding ways to operate the assets they operate well, and then those that don’t do a good job, finding new homes for them.”

An example of such a deal was the completion of the sale of assets of KentuckyOne, a subsidiary of CommonSpirit Health. The large not-for-profit system essentially paid the University of Louisville to take over four Louisville-area hospitals by forgiving $19.7 million in outstanding promissory notes, while the university paid CommonSpirit $10 million.

“It’s not often that you get paid to take something in healthcare, but that was the case here,” Tierney said. “That’s what jumps out as an asset that is totally distressed.”

Other transactions that involved distressed hospitals and were announced in the quarter, according to H2C, included:

• St. Christopher’s Hospital for Children in Philadelphia
• Massena Memorial Hospital in Massena, New York
• Cumberland River Hospital in Celina, Tennessee
• Fayette Regional Health System in Connersville, Indiana

Strong partners sought

An impetus for deals involving distressed hospitals was the conclusion of health systems that the finances of some hospitals may be untenable. Specifically, the thinking was that hospitals that have been unable to turn themselves around amid the improved margins stemming from coverage expansions under the Affordable Care Act may never turn around, said Nick Beale, another director at H2C.

“It’s mainly that costs have grown faster than revenue has for many community-owned or rural hospitals,” Beale said. “Eventually they find themselves in a situation where it is an unsustainable path forward.”

As many hospitals also anticipate needing large capital expenditures, their best long-term solution may be to find a strong partner organization, Beale said.

The increasing frequency of deals involving smaller hospitals was highlighted by Irving Levin, which noted 30 deals in 2019 have involved hospitals or health systems with 100 or fewer beds, compared with 21 such deals through the same period in 2018.

“I’d be confident saying that many smaller hospitals and health systems are facing reality and joining larger regional systems for the financial and operational security they can provide,” said Lisa Phillips, editor for Irving Levin’s healthcareMandA.com.