Healthcare Industry Appears Unfazed by Looming Recession, Sees M&A Activity Gain Momentum

The past several years of pandemic-driven business uncertainty have roiled markets worldwide. The healthcare industry in particular has faced a spate of challenges, ranging from shrinking operating margins to a sizable exodus of healthcare workers burned out by the demands placed upon them. Though many companies are continuing to slash costs and headcounts in an effort to prepare for rough times ahead, Kaufman Hall has reported that healthcare merger & acquisition (M&A) activity is showing a new momentum.

The firm’s latest analysis of healthcare transactions indicate a rebound in M&A activity since the COVID-19 pandemic, reporting that 2022 ended with 53 announced transactions and more than $45 billion in total transacted revenue. While the total number of transactions is still lagging behind pre-pandemic levels, the firm maintains there are clear signs that the momentum will continue into the new year.

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The analysis shows the “mega merger” (transactions in which the smaller party has annual revenues in excess of $1 billion) is continuing to trend through 2022, making up more than 15% of the year’s transactions, just shy of 2021’s historic high of 16.3%. The high number of mega mergers, in addition to other large transactions announced last year, has led to a historically high average smaller party size by annual revenue of $852 million, over $200 million greater than 2021’s then-historic high.

The CAGR of the average smaller party size over the past ten years is nearly 12%.

Kaufman Hall’s analysis notes that some of 2022’s biggest transactions are representative of cross-market deals, another significant trend last year, where merging organizations have little to no overlap between markets.

“A benefit of cross-market mergers is that they do not actually change the competitive structure of the markets involved in the merger — there is no increase in the concentration of local hospitals or health systems, an increasingly important feature considering the current regulatory landscape,” the analysis states. “A noteworthy element of many of this year’s cross-market mergers is that the systems have a common focus (e.g., rural health), complementary skillsets (academic medicine and community health), or a shared desire to improve health outcomes.”

With rising costs of capital, higher interest rates, and growing regulatory scrutiny of M&A activity in general, 2023 could still present significant challenges to the healthcare industry, but thus far, the market’s appetite for new purchases has yet to be sated.