Hospitals and health systems have been struggling with financial stability in the last few years, an issue that has affected the health sector’s M&A activity, as a recent report from Kaufman Hall has illuminated. According to the report, hospitals’ median operating margins were in the red for all of 2022. Figures have improved this year, and 2023 is predicted to be a more stable year for hospital finance than the last. However, the current year-to-date median operating margins are slightly above 1%, which is still significantly below the 3% or higher margin required for long-term financial sustainability.
These financial pressures have resulted in a striking metric that Kaufman Hall discovered in its report. Nearly 40% of the M&A deals announced during the third quarter were motivated by financial distress. This number is well over historical benchmarks.
The report also highlighted that M&A activity among hospitals has been returning to pre-pandemic levels this year. The third quarter saw 18 M&A transactions compared to seven in Q3 2021 and 10 in Q3 of last year. Factors driving the increase in M&A activity include hospitals seeking partnerships to bolster and protect their long-term financial sustainability.
The 18 M&A deals concluded in Q3 resulted in a total transacted revenue of $8.2 billion. This was a decrease from Q2’s $13.3 billion, which was influenced by three mega mergers, defined as a deal in which the smaller party’s annual revenue exceeds $1 billion. Q3 witnessed only one mega merger—the planned combination of Oregon Health & Science University and Legacy Health.
The report highlighted an upward trend in independent hospitals seeking to combine with larger organizations. In acquiring these significant partnerships, the average annual revenue of the seller (the smaller party) for Q3 was $453 million. When the mega merger deals are excluded from Q2 and Q3, the average revenue in Q3 ($243 million) was considerably higher than Q2 ($159 million).
Regarding the type of organizations involved in Q3’s 18 deals, nonprofit health systems were the larger party in 14 arrangements, seven of which were academic/university-affiliated health systems. The report observed that academic health centers have seen patient volumes return to pre-pandemic numbers faster than other acute care hospitals, reflecting a 70% median inpatient occupancy rate compared to 53% at other acute health care hospitals.
For more details, readers can review the full report.