Merger and acquisition revenues for health systems hit $45B in 2022

Merger and acquisition revenues for health systems hit $45B in 2022 Jeff Lagasse

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The fourth quarter of 2022 was a banner period in terms of healthcare merger and acquisition revenues, and the transactions that took place in the quarter pushed M&A revenues to $45 billion for 2022, according to a new Kaufman Hall analysis.

There were seven announced transactions in Q4, and four of them met Kaufman Hall's definition of "mega merger," in which the smaller party has annual revenues in excess of $1 billion. A fifth had a smaller party with revenues in the $500 million to $1 billion range.

Q4 marked the third consecutive quarter in 2022 in which the average size of the smaller party across all announced transactions exceeded $800 million. Because of that, the average smaller party size for the year reached $852 million, well above 2021's total of $619 million, which had been the record.

WHAT'S THE IMPACT

In total, there were 53 announced transactions for 2022. Smaller party annual revenues exceeded $1 billion in more than 15% of the transactions, just below 2021's historic high of 16.3%.

While the number of transactions was a slight increase from the 49 posted in 2021, it's still below pre-pandemic levels. But the combined revenue of the parties in the 2022 transactions resulted in more than $45 billion in total transacted revenue for the year. That's higher than the recent historic high of $44 billion, recorded in 2017 – this despite having less than half of the total transaction volume.

While many hospitals and health systems continued to struggle financially in 2022, the percentage of financially distressed sellers, at 15%, was slightly below the 16% level seen over the previous two years.

Buying and selling activity among nonprofit hospitals and health systems grew to 91% of total transactions in 2022 – up from 87% in 2021 and 81% in 2020.

One significant trend in 2022 was the increase in cross-market transactions, which connect health systems located in different geographies with little to no overlap between markers.

Deals linking Advocate-Aurora Health and Atrium Health, University of Michigan Health and Sparrow Health, and Sanford Health and Fairview Health all represented cross-market transactions, with Kaufman Hall noting a shift to capability-based scale, as opposed to market-based scale.

Perhaps the key to this shift, according to Kaufman Hall, is a desire to spread operating risks across multiple markets and different market types, such as rural or urban. But other factors can come into play, such as expanding access to an academic medical center's specialty services to new markets.

A November Health Affairs study suggested this cross-marker consolidation could harm competition. Economic theory predicts – and evidence is emerging – that cross-market hospital systems raise prices by exerting market power across markets when negotiating with common customers, primarily insurers.

THE LARGER TREND

A December analysis from PricewaterhouseCoopers found that healthcare mergers and acquisitions are expected to continue with ever-increasing transaction volumes, despite a shaky economy and fears of a recession.

Transaction volumes will continue to increase due to enhanced attention on private equity platform add-ons and the continued resilience of the sector, analysts project. And value-based care is expected to be on the rise. Fee-for-service-focused models are in the rear-view mirror, and players are diving in and embracing value-based care throughout the ecosystem, PwC found.

These factors, along with continued large levels of corporate cash, translate into a continued strong outlook for health services deal volumes in 2023.

Twitter: @JELagasse
Email the writer: Jeff.Lagasse@himssmedia.com