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Our Take: Financial distress fueled increase in hospital and health system M&A activity in 2023, report indicates

Jan 29, 2024

A total of 65 mergers and acquisitions were announced last year by hospitals and health systems, up from 53 in 2022, according to a report by management consulting firm Kaufman Hall. The total “transacted revenue” was $38.4 billion.

Along with the increase in the number of transactions was an increase in the percentage of transactions involving a financially distressed organization, the authors of the report noted. Nearly 28% of the transactions announced last year involved a hospital or health system experiencing financial distress, almost double the percentages seen in 2020-2022 (17%, 16%, and 15%).

It wasn’t just smaller hospitals and health systems that sought a partnership because of financial difficulties. Larger systems are now in the mix, according to the report, including some with annual revenue of $1 billion or more. 

The average size of the smaller party (by annual revenue) was $591 million in 2023, down from $619 million in 2022 but still considerably higher than in the years from 2012 through 2020. 

Mega mergers, defined as transactions in which the smaller party has annual revenue of more than $1 billion, accounted for 12% of total announced transactions in 2023, down slightly from 15% in 2022 and 16% and 2021. 

Referencing a separate Kaufman Hall report, the authors said the median year-to-date operating margin at the end of November was 2.0%, which was “still well below the 3% – 4% range often cited as a sustainable operating margin for not-for-profit hospitals and health systems.”

The other trend that stood out in 2023, besides financial distress driving more M&A transactions, was the continuing reorganization of regional health care markets, the authors noted, pointing to the partnerships between Froedtert Health and ThedaCare in Wisconsin and BJC HealthCare and St. Luke’s Health System in Missouri and Kansas as examples. 

Academic health systems continued to develop regional networks by acquiring or forming partnerships with community hospitals, which not only provides support for the hospitals and helps to ensure access to care but also eases “some of the occupancy constraints at the academic medical center flagship by utilizing available space in high-quality community hospitals for lower acuity patients,” according to the report.

The authors said they expect the focus on regional market development and the influence of financial pressures to continue in 2024. They also anticipate seeing more creative partnership models in the year ahead, spurred by factors such as the desire to stay independent, the desire for less capital-intensive partnership structures, and more stringent regulatory oversight.  

Our Take: While many hospitals and health systems are clawing their way out of the financial turmoil 2022 wrought, the recovery is slow — and not necessarily steady. 

Even a powerhouse like Cleveland Clinic remains cautious, despite the improvements the organization has seen in the past year. The health system generated more than $14 billion in revenue in 2023, exceeding its revenue projections for the year, according to a news release. It also finished the year with an operating margin of 0.4%. 

In 2022, Cleveland Clinic reported a net loss of $1.2 billion and an operating margin of -1.6%.

During the organization’s annual State of the Clinic address to employees on Wednesday, Dr. Tom Mihaljevic, CEO, said, “In the past, these results would assure a healthy financial foundation for Cleveland Clinic, but all hospitals, including us, are challenged by inflation. The rising cost of wages, supplies, and pharmaceuticals has greatly outpaced nominal increases in reimbursement.”

“We sustain and advance Cleveland Clinic’s mission by serving patients and managing our resources,” he added. “It is possible to use fewer resources while touching more lives.”

Looking ahead, Dr. Mihaljevic said the health system would invest in “smart growth” opportunities — like expanding its real estate footprint and using artificial intelligence to address workforce shortages and manage hospital resources more efficiently. 

In contrast, Steward Health Care System, a Dallas-based, for-profit organization with hospitals in eight states and the largest physician-owned private health care network in the U.S., continues to struggle. 

The Wall Street Journal reported on Thursday that Steward Health has engaged advisers and is considering options for restructuring, according to people familiar with the matter. 

Steward reportedly owes Medical Properties Trust approximately $50 million in unpaid rent and has been closing facilities in multiple states. The latest closure was announced on Friday — the Beaumont campus of Medical Center of Southeast Texas is slated to close on Feb. 2. 

In early December, Steward announced that New England Sinai Hospital in Stoughton, Mass., would close this spring. Steward said it had lost $22 million on operations at the facility since 2010 and could not afford to keep it open, according to Boston’s ABC affiliate station, WCVB. 

Members of the congressional delegation in Massachusetts, where Steward operates nine facilities, asked Steward last week to brief them on the health system’s finances, the status of the facilities it operates in the state, and the health system’s plans to ensure the communities it serves “are not abandoned.”

“Given that 70% our patients are covered by state and federally funded programs, we look forward to briefing the delegation and exploring potential solutions,” Steward said in a statement emailed to WBUR, Boston’s NPR news station.

According to WBUR, state officials are considering options to keep the hospitals open, including the possibility of other health systems taking over some of Steward’s facilities. 

What else you need to know

Humana reported a net loss of $541 million for the fourth quarter, compared with a net loss of $15 million in the same quarter a year ago, sending the company’s stock price tumbling Thursday morning for the second week in a row. The Q4 earnings-per-share results were well below analysts’ expectations, even though a week earlier Humana lowered its 2023 profit outlook based on higher-than-expected Q4 medical spending. At 90.7, the company’s quarterly medical loss ratio (MLR) was the highest in a decade, according to Healthcare Dive. Humana issued initial 2024 earnings guidance of approximately $16 per share on an adjusted basis and said the guidance assumes that higher Medicare Advantage medical costs will persist throughout this year. (For comparison, Humana reported adjusted EPS of $26.09 for 2023, and Healthcare Dive reported that analysts had previously anticipated Humana’s 2024 adjusted EPS would be around $29.) Humana also slashed its adjusted EPS target for 2025.  

Meanwhile, Elevance Health’s fourth-quarter performance was better than analysts expected. The company reported net income of $856 million for the quarter (down 1% from the previous year’s final quarter) and a profit of $6 billion for the full year (up 1.6% from 2022). The insurer’s fourth-quarter and full-year MLRs were slightly improved from the corresponding MLRs a year earlier. Like other payers, Elevance saw higher utilization in the fourth quarter, but the company said premium adjustments offset much of the increase in medical costs. Elevance expects its MLR to remain relatively flat this year, at around 87%, and set its adjusted EPS guidance for 2024 at greater than $37.10.

Walgreens may sell Shields Health Solutions, Bloomberg News reported, citing people familiar with the matter. A potential deal could value the specialty pharmacy business at more than $4 billion, according to the report. Walgreens and private equity firm Welsh, Carson, Anderson & Stowe made equity investments in Shields Health Solutions in 2019. In September 2021, Walgreens spent $970 million to increase its ownership stake to 71%. A year later, Walgreens agreed to acquire the remaining stake for $1.37 billion. Walgreens has not confirmed the reports of a possible sale. 

Sanofi agreed to pay approximately $1.7 billion to acquire Inhibrx, a biopharmaceutical firm based in La Jolla, Calif. Sanofi is basically only buying one of Inhibrx’s drug candidates: INBRX-101, which is entering Phase II clinical testing as a treatment for alpha-1 antitrypsin deficiency, a rare, inherited disorder that can lead to lung and liver damage. The remaining assets in Inhibrx’s pipeline, all of which target cancer, will be spun off into a separate, publicly traded company that will operate under the Inhibrx name. According to a press release, Sanofi will hold an 8% equity stake in the new company. Along with the upfront payment, Inhibrx’s shareholders will receive a contingent value right (CVR) for each share they own, which could entitle them to an additional $5 per share, or a total of approximately $296 million, if the FDA approves INBRX-101 by June 30, 2027. The boards of both companies have approved the deal, which is expected to close in the second quarter.

The Federal Trade Commission filed a lawsuit to stop Novant Health from buying two North Carolina hospitals from Franklin, Tenn.-based Community Health Systems, stating that the proposed acquisition “threatens to raise prices and reduce incentives to invest in quality and innovative care.” Nearly a year ago, Winston-Salem, N.C.-based Novant Health announced plans to acquire Lake Norman Regional Medical Center, Davis RMC, and other related assets from CHS for $320 million. Novant Health operates Huntersville Medical Center, which is 11 miles from Lake Normal RMC. The FTC said the transaction would give Novant Health control over nearly 65% of the market for inpatient general acute care services in the Eastern Lake Norman area and would likely increase health care costs by several million dollars annually. 

Irvine, Calif.-based CG Oncology raised $380 million in the first biotech IPO of 2024. Initially, the company set its sights on a share price between $16 and $18, according to FierceBiotech, but ended up offering the shares at $19. The stock debuted at $29 per share on the Nasdaq Thursday morning, Reuters reported, and was trading as high as $38.40 later in the day. CG Oncology’s only pipeline asset is a targeted immunotherapy called cretostimogene grenadenorepvec, which is being developed for high-risk BCG-unresponsive non-muscle invasive bladder cancer. 


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