Is M&A the key to survival?

Like all of us, hospitals and IDNs have had to adapt quite a bit in recent years. Over the past decade, we have seen a dramatic shift away from care delivery at inpatient facilities to outpatient facilities like physician groups and ambulatory surgery centers (ASCs). We saw this trend continue with the onset of COVID-19, along with a string of new challenges for hospitals and IDNs, including lower revenue, staffing shortages and increased costs.

As hospitals and IDNs begin to chart their next steps, it’s important to consider what it will take to succeed. In this blog, we’ll look at the implications of M&A on the healthcare industry, including how M&A could help hospitals and IDNs survive.

M&A in hospitals and IDNs

The number of hospital mergers and acquisitions has taken off in the past decade, and it’s likely this trend will continue in the years ahead.

Definitive Healthcare tracked 398 M&A news stories in 2020 and 314 M&A news stories in 2021. These reports show that in just the past year, there have been several significant healthcare deals, including:

• Spectrum Health and Beaumont Health plan to merge
• Einstein Healthcare Network and Jefferson Health finalize merge
• Lifepoint Health and Kindred Healthcare complete merge

Keep reading for a few reasons why M&A may be the key to survival for hospitals and IDNs.

Reduced costs

Many hospitals and IDNs struggled financially due to the toll of COVID-19. Kaufman Hall found that half of hospitals had negative margins at the start of 2021 due to the pandemic.

M&A can reduce costs, offering appealing advantages to healthcare organizations with financial trouble. NCCI Insights found that acquired hospitals especially benefit, with reductions in operating costs between 15% and 30%, mostly through economies of scale.

Other ways that M&A improves hospitals’ costs include:

• Standardizing clinical practices
• Increasing hospital scale
• Decreasing hospitals’ cost of capital
• Reducing patient leakage
• Improving negotiating power with suppliers

Enhanced quality of care

Healthcare M&A can also promise a better quality of care.

A study published in The Journal of the America Medical Association found that mergers among rural hospitals were associated with better mortality outcomes for some conditions.

The AHA report found evidence for improved clinical quality from hospital mergers due to:

• Upgraded services at hospitals that were acquired
• Standardized clinical protocols
• Concentrated complex services offerings at fewer service sites
• Increased staff at hospitals that were acquired

Increased access to care

M&A may also help expand access to care.

An analysis by Kaufman Hall highlights that acquisitions of financially struggling hospitals can help protect access to care. In fact, in the analysis, more than 80% of transactions involving bankrupt hospitals were saved from bankruptcy and currently remain in operation. When these hospitals stay in business, care options for many patients in the area remain local and accessible.

M&A can also expand acquired hospitals’ service offerings. For example, Kaufman Hall’s analysis found that 38% of hospitals that were acquired added at least one service after the acquisition. Expanded services further improve care options for patients.

Outpatient center M&A

There has also been a growing number of M&A involving outpatient centers due to the recent shift in care. In line with this trend, Deloitte predicts demand for hospital beds will be 44% lower in 2030. The lower costs and better outcomes associated with outpatient centers drive the shift in care and increase in M&A of the centers.

In particular, our data shows ASCs have improved clinical outcomes and cost savings through lower rates of both post-surgical complications and readmission rates. Further, ASC availability reduced healthcare costs by over $38 billion per year, passing savings on to patients through lower copays and deductibles.

As ASCs become even more popular and care continues to shift, IDNs will continue to lose revenue. However, IDNs can keep up with changing needs and prevent lost revenue through acquisitions of ASCs and similar outpatient centers.

Let’s look at an example

In 2017, Optum of UnitedHealth Group acquired Surgical Care Affiliates for an astounding $2.3 billion. This acquisition by healthcare-giant UnitedHealth Group/Optum is indicative of the investment that many healthcare companies are now willing to make to keep up with the shift in care and remain in business.

What to expect moving forward

Needless to say, the world has experienced a lot recently, including the COVID-19 pandemic, the Ukraine invasion, global supply chain issues and the physician shortage.

• KPMG suggests these crises threaten many healthcare organizations’ financial health, which will cause more hospital restructuring, consolidation, bankruptcies and closures.
• KPMG also anticipates the volume and valuation of deals in 2022 will be lower than those of 2021 because of geopolitical uncertainty, increased interest rates, supply chain difficulties and reduced investor leverage.
• We expect to see more M&As within the outpatient center area due to the shift in care.

M&A needs to be done well

With more M&A expected in the future, these deals must be high-quality and mindful of various factors. Deloitte highlights that companies should factor in local market dynamics and, perhaps more importantly, effectively address culture and communications.

If done well, M&As can prove to be a valuable option for healthcare organizations adapting to changing environments.

Learn more

As healthcare continues to change and consolidate in pursuit of better costs, quality of care and access to care post-pandemic, healthcare commercial intelligence can help you stay in the know of industry trends and developments.

You can also gain access to the latest, most relevant M&A news through our platform.

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