Vital Signs December 2023: Healthcare Sector Outlook

VITAL SIGNS

Push to Consolidate in the Face of Growing Pressure As predicted in the previous edition of Vital Signs, M&A activity continued into 2023 with several major transactions. Given the importance of scale for controlling costs, negotiating contracts with payers, and establishing a diversified market footprint, we’ve seen growing conglomeration in the healthcare sector. In its quarterly review of Healthcare Mergers and Acquisitions, Kaufman Hall noted that Q3 2023 saw 18 announced mergers, significantly higher than 2022. The report notes that “14 of the 18 announced transactions in Q3 2023 involved not-for-profit acquirers, and of those 14, 50% were academic or university-affiliated health systems.” The report further noted that financial distress was one of the chief motivations for merger activity among health systems: “For many smaller to medium-sized health systems, the upward reset in fixed costs—including both labor and non-labor expenses—is a particularly acute problem. Their relative size constrains their ability to spread these costs across a larger number of facilities and services. We are seeing continued activity among systems with annual revenues in the range of $250M to $750M that have sought a partner. What is new in recent quarters is the number of larger systems—those with annual revenues of $1B or more—that also are citing financial distress as a driver for their decision to partner.” 1 This year saw somewhat further consolidation in the healthcare provider space, though the capital markets landscape has also had a tempering effect on this front. St. Louis-based BJC Healthcare has announced a planned merger with Kansas-City based St. Luke’s Health System to create a $10B entity that would total 28 hospitals as the primary healthcare system of Missouri. In Michigan, Henry

1 Kaufman Hall Q3 2023 Hospital Activity Report: https://www. kaufmanhall.com/sites/default/files/2023-10/KH-MA_2023_Q3 Activity-Report_Final.pdf

VITAL SIGNS 2022: PERSPECTIVES ON HEALTHCARE AND MEDICAL OFFICE BUILDINGS