Fewer but larger, health care mergers reported in second quarter of 2022

Merger activity among health systems in the second quarter of 2022 followed a pattern set a year ago: the number of mergers declined compared to 2016 and 2017, but the overall value of the merger partners continued to skyrocket.

That’s what a recent report from KaufmanHall, the healthcare consulting firm, tells us about the ongoing consolidation of health systems. Merger mania was interrupted and redefined by COVID-19. Now, players appear to be more focused on consolidating health systems of some magnitude. Meanwhile, interest in joint venturing or merging with entities such as long-term care and skilled nursing facilities (SNF) has waned in the wake of the pandemic.

Here are the numbers:

• Total 2Q22 transactions: 13 (2Q20 and 2Q21: 14).
• Total transacted revenue: $19.2 billion – substantially higher than the total from the prior seven years.
• Average smaller party size: $1.5 billion, completely shattering all prior second quarter records.

KaufmanHall says the smaller number of total transactions are a misleading indicator of the dynamic nature of healthcare M&A.

“The small number of transactions [was] offset by a high percentage of ‘mega’ transactions, in which the smaller party or seller has annual revenues in excess of $1 billion … Indeed, the average size of the smaller party reached a record-setting $1.5 billion this quarter.”

The mega mergers involve the $27 billion proposed combination of Advocate Aurora Health and Atrium Health. The latter — the “smaller party” — report nearly $13 billion in revenue last year. MercyOne, with “only” $3 billion in revenue, made its alliance with $20 billion (revenue) official in quarter. These two transactions served to push the quarterly figure into new terrain.

Other mergers contributing to the strong quarter include Bellin Health System/Gundersen Health System (smaller party revenue of $800 million) and George Washington University Hospital/Universal Health Services (smaller party revenue of $600 million).

“The full return this quarter to the trend of fewer but larger hospital and health system transactions signals what may be a long-term shift in hospital and health system transactions. We expect continued activity in this space, but believe that the emphasis on transformative combinations, strategic rationale, and heightened selectivity will only grow,” the report says.

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A couple of transactions demonstrated the effects of the pandemic on both health systems and their consumers. The pandemic revealed uncertainties and even structural problems with skilled nursing and long-term care facilities. Health systems’ appetite to pull these kinds of operations into the fold was blunted by the turmoil in those sectors.

“Changes in the long-term care industry and the desire to reinvest in core services were cited as drivers of these transactions,” the report says. … “These changing dynamics — together with SNFs’ unique operational profile — are prompting health systems to reassess strategic options for providing post-acute skilled care.”