Financial activity within the hospital sector started showing new signs of life beginning in 2022 with the waning of the pandemic across much of the United States. That activity became more palpable in 2023 as the public health emergency (PHE) came to an official end. This is the assessment reached by researchers at Kaufman Hall (KH), one of the nation’s premier financial and capital consulting firms.

In a recently released study that looked at financial trends within the healthcare industry in 2023—especially those dealing with mergers and acquisitions—KH identified some indicators that may bode well for the coming year. This article will act to summarize some of key highlights of the study.

Signs of Momentum

The KH report indicates that there were 65 announced transactions in 2023. This represents an increase over the 53 transactions in the prior year. Significantly, 16 of the 65 transactions were announced in just the last quarter of last year. Over the last 10 years, the high point in such transactions was 117 in 2017. The report went on to state the following:

The increase in the percentage of announced transactions that involved a financially distressed partner—rising from 15 percent in 2022 to 28 percent in 2023 and representing the highest percentage since this data has been tracked—reflected the ongoing operational and financial pressures many hospitals and health systems continue to face.

The total revenue involved in hospital transactions for 2023 amounts to a whopping $38.4 billion, which is considered high by historical standards. The average deal size (based on the size of the smaller party) was $591 million. Researchers went on to note that facilities with an A- credit rating or higher remained consistent with the last four years, with over 12 percent of selling organizations maintaining at least an A- rating.  

Underlying Drivers

According to the study, both small and large health systems were driven to pursue mergers and acquisitions due to financial distress. Researchers determined that there was an increase in the percentage of financially distressed organizations that sought a partner in 2023. Indeed, the KH study summed up the situation as follows:

Hospitals and health systems faced one of their most challenging years in 2022, with median operating margins staying in negative territory throughout almost the entire year. Those financial pressures emerged as a key driver of M&A activity in 2023, with financial distress cited as a factor or otherwise evident in 28 percent of announced transactions, compared with 15 percent in 2022.

Financial distress is one factor driving the continued climb of the median size of smaller parties by annual revenue during 2022 and 2023 compared to historical trends. In fact, the median size has doubled since 2019.

KH has also noted an increasing number of larger systems citing financial distress. This represents a change from the historical concentration of distress in smaller hospitals and health systems. As in the previous two years, so called “mega mergers” represented more than 10 percent of the transactions in 2023 (12 percent in 2023, compared with 15 percent in 2022 and 16 percent in 2021). Such mergers reflect transactions in which the seller has annual revenues in excess of $1 billion.

Indicators for 2024

Kaufman Hall expects the trends from 2023 to continue into the current year. They may even intensify. Here’s a snapshot of what we may be able to expect for 2024:

• Focus on regional market development. Many health systems are expected to focus on development of regional markets or, for larger national systems, the development of key regions within their portfolios.
• Continued influence of financial pressures. Stability of financial performance may not be enough to ensure long-term sustainability. Organizations that continue to face financial struggles should focus on defining and enhancing the attributes of their system that could make them an attractive partner.
• Movement among independent community health systems. Facilities with lesser scale typically have less margin for error and will likely continue to seek partnerships.
• New partnership models. Emphasis on maintaining independence, an interest in less capital-intensive partnership structures, and certain regulatory challenges will drive the creation of new partnership models in 2024.

To view the full Kaufman Hall report, please visit the following link: 2023 Hospital and Health System M&A in Review | Kaufman Hall.