Last year a lull in provider mergers and acquisitions was followed by an uptick. Experts say the disruptive effect of COVID-19 may mean plenty of deals this year.
Despite — or maybe because of — the COVID-19 pandemic, the pace of mergers and acquisitions (M&A) in the provider healthcare sector was brisk last year, and some of the same forces may be at play this year.
While M&A activity paused briefly in the spring, it returned to historic averages by summer. According to a recent report by Kaufman Hall, M&A activity crescendoed in 2020, with a high level of activity by not-for-profit hospitals and health systems. The report shows that 19 transactions with a value of about $8 billion occurred in the third quarter, a level on par with historical averages and significantly higher than the 14 transactions in the second quarter.
Those with healthcare M&A expertise see the same pattern: a COVID-19-related pause early last year followed by an increase in dealmaking as the year went on. John Fanburg, a managing member and chair of healthcare law at Brach Eichler, a law firm in Roseland, New Jersey, says M&A activity was high in 2020 till mid-March, when COVID-19 hit and transactions either slowed dramatically or came to a complete halt. “Activity recommenced in June, and deals picked up from where they stopped,” he says.
Gay Casey, a managing director at Berkeley Research Group, a consulting firm in Philadelphia, notes that transaction activity reported through the third quarter is a leading indicator that healthcare providers are moving beyond the immediate impacts of the COVID-19 pandemic. “We are seeing a lot of M&A activity in the post-acute healthcare setting, including physician group partnerships and joint venture agreements between hospitals and home healthcare/hospice providers,” she says.
Anu Singh, a Kaufman Hall managing director, says the pandemic has, in fact, strengthened the rationale for strategic partnerships, leading to a potential uptick in M&A .
“The reality is, COVID was a clinical impact item to a lot of organizations, but what was happening inside and outside the industry pre-COVID was a bigger story,” he says. “We’re seeing whole new ways of delivering care, whole new ways to collaborate, find value and deal with new reimbursement models. COVID has certainly accelerated these pursuits, but the most forward-thinking systems were already charting this path before the pandemic.”
Singh says providers are facing the fact that pre-pandemic revenue streams may not return. “In order to compete moving forward — whether it’s investing in telehealth or an urgent care presence in their communities — many organizations are realizing they need more capabilities and resources and are working with other organizations on a path to viability,” he says.
Four major mergers were announced in the third quarter of last year:
The major M&A trend, Singh notes, is large organizations thinking more strategically around partnership opportunities. “I think we’re going to see some systems who appreciate where they need to be from a geographical standpoint with facilities and now want to build out more services,” he says.
The pandemic has created an environment ripe for an increase in M&A, especially among smaller systems, rural hospitals and independent practices, says Brandon Edwards, CEO of ReviveHealth, a health communications company in Nashville, Tennessee. “While the CARES Act helped some, and elective care and routine care are picking up, many are still likely to need a partner to survive,” he says. The Coronavirus Aid, Relief and Economic Security Act, or CARES Act, is the $2.2 trillion economic stimulus bill passed in March 2020.
Edwards says M&A in the healthcare sector definitely slowed because providers have been consumed with managing through the pandemic, but as operations have trended upward, that will likely change. “We’re seeing some of the normal activity with larger systems looking to expand their geographic footprints,” he says. “But we also saw some newer dynamics like Novant and UNC (University of North Carolina) creating a partnership so they could go after New Hanover Regional Medical Center in eastern North Carolina. As the industry evolves, so will the definition of a partner.”
Edwards points to CHI Franciscan and Virginia Mason as a possible template for future pairings — an innovative system and a community hospital, respectively, joining forces.
Edwards says it’s worth noting that some deals fell apart last year. Beaumont Health in Michigan and Summa Health in Northeast Ohio called off their plans to combine in 2020. Advocate Trinity Hospital, Mercy Hospital & Medical Center, South Shore Hospital and St. Bernard Hospital, four money-losing hospitals serving a largely poor patient population on Chicago’s South Side, abandoned their plans for merging after funding from the Illinois Legislature fell through.
There are some centrigual forces at play, notes Nathan Kaufman, a healthcare consultant in San Diego. He points to Hoag Memorial Hospital Presbyterian, a two-hospital system in Newport, California, that is seeking to separate from the Providence Health system headquartered in Renton, Washington.
Kaufman says it’s difficult to make predictions for 2021 other than that it is shaping up to be a tough year for healthcare systems. “What is certain is we will have more uninsured, more Medicaid, and very tough negotiations with complicated and very greedy commercial insurance companies,” he says. According to the Kaiser Family Foundation, preliminary Medicaid data show that total enrollment had grown to 75.5 million by July 2020, an increase of 4.3 million beneficiaries from in February.
Edwards at ReviveHealth also sees tough times as the number of uninsured climbs. “Though not certain, it’s highly likely we’ll see a surge in M&A, as large systems can capitalize on this current dynamic to increase market share and geography as well as efforts to place tighter restrictions on M&A activity like we’ve seen in California,” he says, adding that payers may also see acquisition opportunities as some practices struggle.
Edwards notes that Optum, under its parent company UnitedHealth Group, is the second-largest employer of physicians behind Kaiser Permanente and one of the largest managers of surgery centers. “They are using their physician and insurance presence to cherry-pick the most profitable parts of the market, which are Medicare Advantage and ambulatory surgery, leaving everything else for the hospitals,” he says.
Casey at Berkeley Research Group notes that consolidation has been the trend among providers for the past five years; she expects that to continue this year: “We could see an increase in the number of healthcare providers exploring partnerships as a means to recover from the impacts of the pandemic .”
Fanburg at Brach Eichler sees tension between healthcare systems and their physicians. “They are seeing their doctors move in a direction that they cannot control or legally influence in the years to come,” he says. “As hospitals move more toward an outpatient strategy, controlling their medical staff members will be critical to their future strategic goals.”
Keith Loria, a frequent contributor to Managed Healthcare Executive®, is a freelance writer in the Washington, D.C., area.