Study: Hospital mergers decreasing, revenue still high

The third quarter saw a decrease in mergers and acquisitions, but the deals that did happen were among organizations with high revenues.

The rate of hospital and health system mergers has slowed in the U.S. but the size of the entities behind the deals continues to grow.

According to a news release, an analysis from consulting firm Kaufman Hall found that the seven transactions involving 20 hospitals were announced within the third quarter with a total transaction revenue of $5.2 billion. Of these transactions, two were “mega-mergers” where the smaller partner or seller has average annual revenues over $1 billion.

The average seller size by revenue was $659 million, which is more than double the average between 2015 and 2020. This brings the total transacted revenue to date in 2021 to $22.4 billion. This puts 2021 nearly on par with past years despite there only being half of the total transaction volume, according to the release.

A previous analysis from Kaufman Hall found that through the second quarter of 2021, total revenue is the second highest in recent years at $17.2 billion with 27 transactions. In 2020, revenue for the same period was $17 billion with 43 transactions.

Activity in the second quarter was below pre-pandemic historical averages with 14 announced transactions, though this was consistent with second quarter, 2020 levels. The smaller number of transactions was offset by a high number of transactions with seller revenue above $500 million, including one large merger involving two companies with more than $1 billion in annual revenue.

This trend of fewer transactions of a greater size is expected to continue. Some of the drivers of the trend are:

  • Fewer independent hospitals as 67 percent of community hospitals are already part of a larger system
  • Emphasis on strategic partnerships with hospitals becoming more selective in what partnerships they pursue
  • Desire for transformative impact with focus shifting to adding new capabilities or access to new markets

Meanwhile, the federal agency tasked with approving mergers has been overwhelmed with filings.

The glut of merger filings has led the Federal Trade Commission (FTC) to begin warning companies who seek to merge before their investigations are completed.

For mergers the FTC can’t fully investigate during the requested time frame the agency will send out a form letter warning the companies that the investigation is still ongoing and that the deal may still be ruled to be unlawful.

The Biden administration has also turned its attention to the boom in hospital mergers over the past few year. As part of a sweeping executive order President Joe R. Biden asked the Justice Department and FTC to review and revise their merger guidelines to ensure patients are not harmed by the mergers.

The administration points out that hospital consolidation has hit rural areas especially hard, leaving many patients without good options for convenient and affordable health care services. Since 2010, 139 rural hospitals have shuttered, including a high of 19 last year during the pandemic.

When rural hospitals closed, people living in areas that received health care from them had to travel on average about 20 miles farther for common services like inpatient care. For less common services, such as alcohol and drug abuse treatment, the average was 40 miles. Areas where a hospital closed also saw a decrease in the number of doctors available.

The agency notes that the issuance of such a letter should not be construed to mean that the deal is unlawful, and the failure to receive this letter should not be taken as an indication that the deal is lawful, according to the release.

According to the FTC website, the agency received 2,067 merger filings between January and July 2021. This is a huge increase from 2020 which saw 815 filings in the same period.