Hospital and health system dealmaking volume fell from a busy start of the year, though a couple of megamergers and “an emphasis on strategy over scale” have kept the sector pretty lively through the second quarter.
Per a Kaufman Hall report published this week, 11 health system transactions were announced during the three months ended June 30, well below 2022’s 20 and the counts of prior years.
Total transacted revenue during the quarter was $10.8 billion, which was also below the last two year’s second quarters but more in line with earlier years’ tallies. The firm wrote that the quarter kept pace thanks in part to a pair of major deals: Kaiser Permanente and Risant Health’s plans to add Cone Health to Risant's value-based care platform and BayCare’s intention to buy out Trinity Health’s interest in its joint venture.
However, more so than their comparative size, the advisory firm was more interested in peeling back the decision-making that’s driving the transactions.
Risant’s dealmaking, for instance, outlines an industry-first model “in which intellectual capital is as—if not more—important than traditional capital,” Kaufman Hall wrote in its report. “Acquired systems retain their brand, their executive leadership teams and local governance. … The ability to launch new services or products, leveraging the expertise of systems that have successfully done the same, is a significant part of the Risant value proposition.”
BayCare and Trinity Health’s deal is emblematic of a broader trend in which large health systems are realigning their operations via divestitures and acquisitions to better focus on markets with major growth potential, the firm continued.
UAB Health System’s plan to purchase Ascension’s central Alabama hospitals is similar but also follows another trend in which academic health systems are branching out to both relieve occupancy at flagship hospitals and preserve access to care in their surrounding communities.
“As pressure intensifies to transform the current healthcare system to bring greater value to patients and communities, the impetus of M&A activity will rely less on seeking capital in traditional ways and instead move toward new, strategic partnership models,” Anu Singh, managing director and mergers and acquisitions practice leader with Kaufman Hall, said of the trends in a statement. “Many of these M&A transactions enable hospitals to sustain and enhance access to care, launch new services, or strengthen and stabilize systems, which allows for future growth.”
Hospital finances remain steady in May
The release of Kaufman Hall’s M&A report coincided with that of its monthly sectorwide performance update.
Here, the firm painted a picture of stability as there were relatively few changes in hospitals’ operating metrics from April to May. Its index of calendar year-to-date operating margins remained flat at 3.8%, though single-month operating margins dipped slightly from 4.2% to 3.7%.
Daily revenues and expenses dipped from April in near lockstep, though a 4% drop in net patient service revenue per adjusted discharge outpaced a 2% decline in total expense per adjusted discharge.
Discharges and adjusted discharges per day were also flat while average length of stay dropped 2% and observation patient days as a portion of total patient days increased by 1% from the prior month. The latter, Kaufman Hall wrote, “reflects that hospitals are likely to be more appropriately classifying and triaging patients.”
Though the numbers suggest the sector is stabilizing in aggregate, Kaufman Hall reiterated its warnings from earlier this year that the situation can be very different from hospital to hospital.
“The widening gap between higher-performing and lower-performing hospitals illustrates the need for longer-term strategic investments. Short-term cuts and crisis management will not make for sustainable change,” Erik Swanson, senior vice president and data and analytics group leader with Kaufman Hall, said in a statement. “Hospitals should seize this relative moment of calm to focus on enterprise strategic planning in order to achieve long-term success.”