The Buzz This Week
Hospital merger and acquisition activity has mostly rebounded after a dip in 2020 due to the pandemic. There were only 66 announced transactions in 2022 compared to the recent peak of 96 in 2019, according to Irving Levin Associates. However, the total number of hospitals and beds changing hands has crept back up in the past couple of years. This is primarily due to the fact that recent deals have involved larger systems coming together, with a larger average hospital size than in the past. Looking ahead, Levin Associates stated in June 2023 that “deal activity is on pace to beat the volume from 2022.”
With that said, the number of failed, abandoned, or unwound deals has also climbed in recent years. Hospital deals can fall apart for a variety of reasons, including failure to reach agreement on key elements such as financial commitment or board composition, a clash between executive leadership, incompatible cultures, or sometimes one party’s choice of electronic medical record vendor. There has been a recent increase in canceled deals after the Federal Trade Commission (FTC) and/or a State Attorney General (AG) have challenged the transaction due to anti-trust concerns. This was the scenario for the RWJBarnabas Health-Saint Peter’s Healthcare System, which was announced in 2020 but called off in June of 2022 after the FTC filed a lawsuit stating that the 2 systems own the only 2 hospitals in New Brunswick, NJ, and the deal would give the combined entity more than 50% market share in Middlesex County. In the same week, the FTC also filed a lawsuit against a proposed deal for Steward to sell 5 of its Utah Hospitals to HCA Healthcare, contending that in many Utah counties, the number of acute care hospital owner/operators would be reduced from 3 to 2 or from 4 to 3, and would lead to an anti-competitive, oligopolistic scenario. That deal was abandoned shortly after the complaint was filed.
In a more complex situation, the South Dakota-based Sanford Health and Minneapolis-based Fairview Health Services merger, which would have included 58 hospitals, was called off in July, after being postponed twice due to opposition from “certain Minnesota stakeholders,” according to leaders at both organizations. This came 10 years after the 2 health systems proposed a similar deal in 2013, which also never came to fruition. Thousands of public comments objecting to the deal were submitted to the Minnesota AG’s office or made during public hearings. The nurses unions were vehemently opposed to the deal, stating “nurses have expressed deep concerns that a merger between these 2 healthcare giants would lead to the loss of healthcare access across Minnesota, but especially throughout our rural communities.” Arguably the strongest opposition came from the University of Minnesota, where the hospitals are owned by Fairview. There was concern about the hospital being governed by an out-of-state entity, and what that would mean for the future of the medical school. At one point, the University requested approximately $1 billion from the state in order to buy back its hospitals and other healthcare assets from Fairview. The Minnesota AG requested more time to review the deal, and in late May 2023, a new law was passed in Minnesota, giving more power to the AG to block or unwind any healthcare transactions with over $40 million in combined revenue that would create a monopoly or “substantially lessen competition,” as well as prohibit any out-of-state entity from controlling the University’s healthcare facilities.
Why It Matters
The debate over whether hospital mergers are good or bad for a community has spanned decades. Hospital leaders and advocates like the American Hospital Association posit that hospital mergers can create economies of scale, which theoretically can help lower prices. They also explain that larger combined entities can serve greater populations, which is required to effectively move to a value-based care system focused on improving population health. Alternatively, critics cite studies that have found that quality and safety have diminished following hospital and health system consolidation. In addition, research has shown that cost efficiencies are difficult to achieve, and are not often passed on to purchasers, payers, or the end consumer/patient.
Lawmakers and agencies like the FTC and Department of Justice (DOJ) focus on anti-trust issues, challenging that with the already highly consolidated healthcare landscape in many markets further merger and acquisition activity will reduce competition and introduce oligopolistic or even monopolistic situations. In fact, last month, the FTC and DOJ put forth 13 proposed guidelines on how they will evaluate whether proposed mergers or acquisitions are anticompetitive and if they should be challenged.
With the increased scrutiny from the FTC, DOJ, and State Attorneys General, the rate of local and regional hospital and health system deals will likely slow. More substantial deals over broader or non-overlapping/non-contiguous geographies may increase, though that may box out smaller entities or require them to be included in deals with more than 2 parties. There is already evidence of this trend—the Advocate Aurora-Atrium deal was not contested by the FTC as the geographies of the entities did not overlap, and that system is now the fifth largest not-for-profit health system in the United States. For similar geographic reasons, the Kaiser Permanente-Geisinger deal also went uncontested. However, some have argued that with the apparent increase in scrutiny from the FTC, it may be possible that they investigate more cross-market deals in the future.
With all this in mind, health systems in search of a partner should consider the following:
- If seeking a hospital/health system partner, geographic overlaps and contingencies should be of utmost consideration.
- Other non-similar partners should also be considered for growth, revenue diversification and margin improvement, such as with payers, specialized vendors that can help stand up programs like care at home, and even private equity firms—as has been discussed in a previous edition of Top Reads.
- Finally, the canceled Sanford-Fairview deal(s) underscores the importance of getting support and approval not only from the FTC, DOJ, and State AGs, but also buy-in from other key stakeholder groups—including surrounding communities, employees, union leaders, and other related entities such as a university or medical school.
There is certainly continued interest in health system partnerships and collaborations. However, given market dynamics, health systems may need to cast a wider net, and explore nontraditional partnerships to continue to grow, improve financial performance, and meet the needs of the populations they serve with high-quality services.
Becker's Hospital Review:
17 called-off hospital deals
American Hospital Association:
The Value of Hospital Mergers
Editorial advisor: Roger Ray, MD, Chief Physician Executive.