Hospital Mergers and Acquisitions: Trends Highlight Recovery Challenges

Average hospital margins stabilized last year, but recent trends in hospital mergers and acquisitions reveal ongoing financial struggles for health systems. According to a report from Kaufman Hall, the percentage of transactions involving financially distressed hospitals reached an all-time high in 2024. The average annual revenue for distressed hospitals also increased significantly from $219 million in 2022 to $401 million last year. This shift marks a new record compared to previous years.

Interestingly, the dynamics of “mega-merger transactions” are evolving. While these mergers used to involve organizations of similar size, there were multiple instances in 2024 where smaller organizations merged with significantly larger ones. Anu Singh, managing director at Kaufman Hall, notes that this change indicates even large organizations are not immune to financial and operational challenges.

Key observations from the report include:
1. 62.5% of the 72 transactions in 2024 included a divestiture, more than double the previous year’s rate.
2. Transactions where the smaller party held an “A-” or higher credit rating reached an all-time low of 2.8% in 2024, down from 12.3% in 2023.
3. Total transacted revenue for financially distressed hospitals in 2024 rose to $8.8 billion, up from $2.3 billion in the prior year, suggesting a shift from distress being concentrated in smaller hospitals.
4. Hospitals continue to face challenges with high expense growth, with median net operating revenue per calendar day growing by 20% over 2021 while total expenses per calendar day increased by 19%.
5. Potential changes in the regulatory environment could impact future mergers and acquisitions in the healthcare sector, with factors such as C-suite executive retirements, transactions seeking new capabilities or market access, and transformative change being key considerations.
The report highlights that strategic transactions focusing on adding new capabilities or accessing new markets are replacing a push for scale alone. Large systems are increasingly seeking partnerships with even larger organizations, reflecting the expanding pressures within the industry.

These trends underscore the complex landscape of hospital finances in the current healthcare environment, with implications for how organizations navigate mergers and acquisitions moving forward.