Mergers and acquisitions among hospitals and healthcare systems are expected to rise, despite the impact of COVID-19.

In fact, the pandemic has raised awareness of the advantages of scaling up, coordinating, and forming partnerships among different entities, according to Kaufman Hall’s M&A Quarterly Activity Report: Q2 2020.

“We are observing that M&A activity is being driven more by the positioning of an individual organization in a market, rather than their more generic setting,” Anu Singh, managing director of Kaufman Hall, told HCB News. "Well-resourced hospitals and health systems with the ability to redeploy resources and innovate may be looking for opportunities for growth, while other organizations may be focused on achieving integration and optimization through new partnerships. Smaller systems or community hospitals may be reassessing their ability to address unprecedented situations like the COVID-19 pandemic — where there is no playbook to turn to — and looking into partnerships as a vehicle for improving and sustaining how they provide care to their communities.”

Kaufman Hall’s National Flash Report last month initially indicated uncertainty around M&A activity, due to operating EBITDA margins falling 174% year-over-year in April and remaining down 9% YOY in May. But with the pandemic showing the benefits of partnerships and scaling, along with the increasing number of restructuring, distressed and bankrupt hospitals expected, such activity is expected to increase as providers and practices open up shop once more.

Evidence to this effect includes the announcement of 14 transactions announced in Q2, including two in June. While below the 29 announced in the previous quarter, the number for the second is not far off from the 19 announced the same time last year. Q2 2020 also had one of the highest figures for average size of seller by revenue ever recorded, at more than $800 million. Total transacted revenue was also high, at just over $12 billion, despite the smaller number of transactions.

Some notable announcements that helped pave the way for these milestones included an acquisition by a group of physicians led by Steward Health Care CEO Ralph de la Torre, of Cerberus Capital Management’s 90% ownership stake in the 35-hospital health system; a non-binding letter of intent by Advocate Aurora Health to explore a possible merger with Beaumont Health, which would generate $17 billion in annual revenues; and resumed talks between Lifespan and Care New England Health System in Rhode Island about a possible partnership.

While pausing such activity, the pandemic did not stop plans to move forward with many transactions and may have actually illustrated the advantages of partnerships, according to the report. It has, for instance, caused healthcare leaders to re-assess current care delivery models and try to determine how their health systems can change to meet needs exposed by the pandemic. In addition, the crisis has led to partnerships that are expected to continue after it ends, such as the possible one between Lifespan and Care New England.

Nine of the 14 announced transactions were acquisitions of for-profit sellers, including six that involved major for-profit systems. Many for-profit health systems are anticipated to continue to change their portfolios over the quarter, with six of the 14 announcing transactions that represent divestitures by major for-profit health systems, including Community Health Systems, Quorum, and HCA. Newly capitalized for-profit hospital owners and operators are also forming and beginning to actively evaluate initial or add-on targets.

Further M&A activity is expected from both for-profit and not-for-profit systems, with many searching for ways to monetize or do away with underperforming assets and strengthen their financial state in the wake of COVID-19. Discussions around pre-pandemic plans are expected to result in definitive agreements or closures through the rest of the year.

“Prior to the COVID-19 pandemic, an increasing number of hospitals and health systems were already looking for strategic partners to work together to better manage care across the entire continuum and migrate to value-based models,” said Singh. “The pandemic has further demonstrated the advantages of scale, coordination, and innovation, strengthening the rationale for future partnerships with transformational goals.”

Academic health systems and religiously affiliated organizations were not represented in any of the second quarter’s transactions.