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Report: Financial distress drove nearly a third of hospital M&A in 2023

Written on Jan 26, 2024

Hospital merger and acquisition activity increased in 2023, according to a new report from Kaufman Hall. Nearly a third of the 65 announced transactions involved a financially distressed system — the highest proportion in recent history, the consultancy said. 

More distressed health systems seeking to consolidate follows a trend of hospitals posting consistently negative operating margins since 2022. As of November, median year-to-date operating margins sat at 2.0%, “well below the 3% - 4% range often cited as a sustainable operating margin for not-for-profit hospitals and health systems,” according to the consultancy. 

For-profit and nonprofit health systems also sought partnerships in “core” regional markets in 2023 to combine care networks and optimize the reach of scarce resources, Kaufman Hall said. 

Health systems announced $38.4 billion in mergers and acquisitions across 2023, with an average deal size — measured by the size of the smaller party — of $591 million.  

Both small and large health systems were driven to pursue mergers and acquisitions this year due to financial distress, according to the report. The consultancy predicted the trend will continue into 2024 as health systems continue to struggle with high labor and supply costs compared to revenue.  

“Many organizations continue to struggle, and the search for partners for these organizations is likely to continue,” the report said. “These trends underscore the need for organizations to, whenever possible, attempt to work from a position of strength when seeking partnership alternatives before financial distress impacts a hospital or health system’s flexibility.” 

Mergers that aim to expand hospitals’ portfolios in key regional markets — such as the recent Froedtert Health-ThedaCare merger and the BJC Healthcare-St. Luke’s Health System merger — are also projected to continue in 2024. 

Academic hospitals are also predicted to partner with community hospitals, according to Kaufman Hall. In 2023, academic health systems reported higher occupancy rates than hospitals and health systems overall. 

However, regulatory challenges may pose a speed bump to merger interest. Regulatory agencies ended the year by tightening merger guidelines, which experts say could have a chilling effect on health care deals. 

In January, the HHS named its first chief competition officer, doubling down on the agency’s promise to address threats to competition in the industry. 

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