Mega-mergers stand out amid a 2022 dip in hospital consolidation

Merger activity among not-for-profit and for-profit hospitals dipped for a fifth consecutive year in 2022, with mega-mergers in the forefront of a sector dealing with operating challenges from inflation, a nursing shortage, and patient volume trends.

Announced mergers and acquisitions dropped to 55 last year from 73 in 2021, continuing a downward course since 2017 when mergers hit 118, according to a review published by Ponder & Co. The sector closed out 2018 with 117 mergers and then sunk to 86 in 2019, 80 in 2020, and 73 in 2021.

“This lower annual total continues the five-year trend of declining volume and marks the lowest annual volume that Ponder has record since we began our database in 2009,” Ponder said. That year, it recorded 58 mergers and acquisitions.

Aurora St. Luke’s Medical Center in Milwaukee was part of Advocate Aurora’s merger with Atrium Health that closed last year.

An uptick in the fourth quarter to 17 transactions from 12 in both the second and third quarters could signalmerger momentum this year, as struggling hospitals turn to consolidation to solve fiscal problems that threaten to trigger bond covenant violations for weaker hospitals and systems.

“Continued pressure on hospitals’ operating margins and muted revenue growth, combined with hits to investment portfolios due to declines in the markets over the past year, leave many hospitals and systems in a vulnerable position,” Ponder said. “Many small-to-mid sized systems are simultaneously considering acquisitions to drive growth while also studying their own needs for a partner in light of the pressures mentioned.”

Rating agencies are watching for the impact of consolidation on balance sheets and long term strategies. S&P Global Ratings has moved its outlook to negative on the sector. Fitch Ratings left a deteriorating outlook on the sector. Moody’s Investors Service in December said its outlook remains negative.

In addition to inflation and age pressure, lengthier hospital stays also dragged down margins eroding the late 2020 and 2021 recovery from COVID-19 pandemic.

The average size of transactions when considering the amount of operating revenues involved swelled to more than $1 billion, doubling the previous annual record over the past decade. What Ponder calls mega-mergers, without defining them, hit seven last year marking a steady increase since a prior peak in 2018 and accounted for 13% of the total number.
Advocate Aurora Health and Atrium Health’s merger announced in May and completed in December, creating a $27 billion health system, heavily influenced the mega-merger numbers.

Trinity Health acquired CommonSpirit Health’s stake in their MercyOne Health System in Iowa. Bellin Health and Gundersen Health System completed their merger of equals announced in July at the end of October. Michigan Medicine announced the acquisition of six-hospital Sparrow Health System in December. Hoag Health System’s separation from Providence St. Joseph Health was announced early last year.

Green Bay, Wisconsin-based Bellin Health and La Crosse, Wisconsin-based Gundersen Health System closed on their merger Dec. 1, forming a $2.4 billion health care system that serves four states. Ahead of the transaction S&P moved its outlook on Gunderson’s AA-minus rating to negative from stable due to its “uneven operating performance.”

Moody’s affirmed Bellin’s A2 rating and positive outlook in November. It did not account for the impending affiliation.

Several health systems have announced letters of intent towards future mega-mergers, including Marshfield Clinic Health System and Essentia Health; Fairview and Sanford Health; and Augusta University Health System and Wellstar Health System.

“Despite the challenges in 2022, select large, financially sound health systems moved forward with major strategic alignments to drive major advances in innovation, valued-based healthcare and expanded regional network,” Ponder said.

Both for-profit and not-for-profit health systems also continued to shed some assets to focus on regional strengths with divestitures accounting for 29% of the M&A activity. For-profit HCA announced the divestiture of its stake of its JV with Tulane University, Lifepoint announced the divestiture of two hospitals in Colorado to not-for-profit CommonSpirit Health, which in turn announced its own divestitures in Oklahoma and West Virginia.

The percentage of transactions involving for-profit targets was 31% in 2022 while top for-profit health system operators did little by way of acquiring not-for-profit assets in 2022.

In fourth quarter developments, several transactions were cancelled and others are facing heightened scrutiny, which was expected after President Biden’s 2021 announcement of plans to deepen anti-trust reviews across a range of industries including healthcare. Some also have faced heightened state scrutiny.

Trinity Health withdrew from its acquisition of Madera Community Hospital, refusing to accept conditions imposed California Attorney General Rob Bonta. The Madera hospital subsequently filed for Chapter 11 bankruptcy and closed. The Federal Trade Commission announced opposition to the state certificate of public advantage known as a COPA application for Crouse Hospital in Syracuse, New York, to merge with SUNY Upstate Medical University.

Minnesota Attorney General Keith Ellison this week asked South Dakota-based Sanford and Minnesota-based Fairview to slow their proposed merger that the systems had aimed to close by the end of the first quarter. The office is holding public hearings and questions have arisen over the fate of the University of Minnesota Medical Center which is currently operated by Fairview.


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