2018 M&A in Review
Variations in M&A Activity Across the States
Strategic Insights: State-Level Activity
Given wide variations in M&A activity across the states, hospitals and health systems seeking expansion opportunities should:
  • Carefully assess their local market. In mature markets, a lack of opportunities or regulatory pressures may make cross-border transactions a more viable strategy for expansion.
  • Pursue opportunities for vertical growth within their market. Well-integrated systems can also achieve improved quality and efficiency outcomes.
Wide variations in hospital and health system M&A activity across the states suggests that the healthcare landscape is changing at a different pace in different markets. To some extent, this is a reflection of the vastly different populations and geographies of the states. Texas, which was the leader in the number of announced transactions for 2018, has a population of more than 28 million and two of the 10 largest metropolitan areas in the country. In contrast, states like North Dakota and South Dakota, neither of which had any announced transactions in 2018, have populations of less than 1 million people. Less obvious are the distinctions between states such as Florida or Pennsylvania, both of which were among the most active states for M&A in 2018, and states such as Virginia, Washington, and Massachusetts, which had no announced M&A transactions in 2018. All have relatively high populations, and most have multiple metropolitan areas. Some of the differences can be explained by regional variations. Many for-profit systems have had a strong presence in the southeastern states that saw significant activity in 2018. Several of these for-profit systems have been divesting hospitals in the region, which have been acquired by not-for-profit systems seeking to expand. In the West, there is a greater focus on vertical integration between health systems and independent physician groups. While this report focuses on horizontal integration between hospitals and health systems, vertical integration is also an important strategic focus that, when done well, can successfully improve quality outcomes and may be more cost effective as well.2
In some states, the regulatory or political environment has discouraged M&A activity. In Massachusetts, for example, the merger between Lahey Health and Beth Israel Deaconess, announced in 2017, received final approval from the Massachusetts attorney general in November 2018, but will be subject to conditions including a seven-year price cap below the state’s annual healthcare cost growth benchmark of 3.1 percent.3 In North Carolina, the proposed merger between Atrium Health and UNC Health Care resulted in significant attention from state officials before talks were suspended between the two systems in March 2018.4 Health systems may also find that their home market has matured and they have maximized their growth within the market. In this case, a move into new markets, including those across state borders, may be the best option. The wide variations in activity at the state level complicate the ability to answer the often-asked question of what the healthcare landscape will look like in the future. If historical patterns of activity over the past six years in Texas, a high-activity state, were projected forward over the next six years to 2024, one would expect fewer large systems in the state (from a current 13 systems with annual revenues in excess of $1 billion to a projected 10 systems of this size in 2024). But more of the state’s total patient revenue would go to the remaining large systems (from 79 percent of total revenue today to almost 90 percent of total revenue in 2024). Yet the level of activity in a state can change dramatically. For example, Kentucky went from five announced transactions in 2017 to none in 2018. And as suggested in the discussion above, these changes in activity can be driven by any number of factors: maturation of a market with fewer available opportunities, a change in the political or regulatory climate, a focus on vertical over horizontal integration, or a combination of these or other factors. Figure 3 demonstrates how much activity has varied in six of the highest population states in recent years.
Further consolidation is almost inevitable as revenue models compress and new competition and payment models impel health systems to expand. But increasingly, the state may not be the appropriate frame of reference as health systems seek to establish a broader regional presence.
3 - Kacik, A.: “Beth Israel-Lahey Health Merger Clears Final Approval with Conditions.” Modern Healthcare, Nov. 29, 2018. https://www.modernhealthcare.com/article/20181129/NEWS/181129916
2 - Hwang, W., Chang, J., LaClair, M., and Paz, H.: “Effects of Integrated Delivery System on Cost and Quality.” American Journal of Managed Care 19(5): e175-e184, 2013. https://www.ajmc.com/journals/issue/2013/2013-1-vol19-n5/effects-of-integrated-delivery-system-on-cost-and-quality
4 - Bannow, T.: “Atrium Health Suspends Merger Talks with UNC Health Care.” Modern Healthcare, March 2, 2018. https://www.modernhealthcare.com/article/20180302/NEWS/180309966
©2018 Kaufman, Hall & Associates, LLC
2018 M&A in Review
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