Kaufman Hall: Value of M&A deals at historic high

Eleven hospital mergers and acquisitions were announced in the second quarter of 2024, indicating solid but reduced activity after a very busy first quarter, according to an analysis published by executives at Chicago-based consulting firm Kaufman Hall. In addition, total revenue in the second quarter of 2024 remained near the all-time high at $10.8 billion despite the overall lower number of deals. All of this was included in the company’s “M&A Quarterly Activity Report: Q2 2024.”

According to data from Kaufman Hall analysts, hospital and health system M&A activity shows that they were deliberately and strategically accumulating intellectual capital or complementary capabilities or supporting system reconfiguration. Two of the 11 deals announced in the second quarter were megamergers, but none of them aimed at larger scale, the analysts say.

“As pressure increases to transform the current healthcare system to provide greater value to patients and society, the momentum of M&A activity will be less based on traditional capital raising and more focused on new, strategic partnership models,” said Anu Singh, managing director and head of mergers and acquisitions at Kaufman Hall. “Many of these M&A transactions enable hospitals to maintain and improve access to healthcare, introduce new services or strengthen and stabilize systems, enabling future growth.”

According to Kaufman Hall’s latest National Hospital Flash Report, hospital financial performance remained relatively stable in May. The rates of change in margins and other key performance indicators have slowed, which analysts see as a sign that the environment is stabilizing.

“The growing gap between high-performing and low-performing hospitals demonstrates the need for long-term strategic investments. Short-term cuts and crisis management will not create lasting change,” said Erik Swanson, senior vice president and head of the Data and Analytics Group at Kaufman Hall. “Hospitals should use this relatively calm moment to focus on strategic business planning to achieve long-term success.”

The emphasis on strategy over size characterized the most significant transactions of the second quarter of 2024 and built on trends we have commented on in recent reports. One trend is the pursuit of intellectual capital and new or complementary capabilities through a strategic partnership, often involving an innovative partnership model. Another trend is the focus of large regional or national systems on market reorganization and strategic re-orientation of their system portfolios. A third trend is the development of networks involving academic health systems and community hospital partners to maintain and improve access to care.

A new partnership model is established

As the report noted, “One of the biggest M&A stories of 2023 was Kaiser Permanente’s launch of Risant Health. Risant is a new health systems division of Kaiser designed to “bring the very best in population health to diverse markets across the country” by leveraging Kaiser’s expertise in care and coverage and the capabilities of the systems it acquires. When it was launched, Risant simultaneously announced its first acquisition, Pennsylvania-based Geisinger Health, a transaction that closed earlier this year. With the announcement in Q2 2024 that Risant is buying a second health system, North Carolina-based Cone Health (one of two mega-mergers in Q2 2024), it is clear that Risant is on track to meet its stated goal of acquiring four to five like-minded, community-based health systems over the next few years.”

Additionally, the report states, “Risant’s transactions represent a new model for healthcare mergers and acquisitions, where intellectual capital is as important – if not more important – than traditional capital. The acquired systems retain their brand, leadership teams and local administration, but as Cone Health noted in a statement about the benefits of the transaction, the partnership with Risant brings “tools, expertise and capital to advance our nonprofit mission and strategy.” The ability to bring new services or products to market while leveraging the expertise of systems that have already done so successfully is a key part of Risant’s value proposition.”