What the future holds for hospital mergers and acquisitions

By Nicole Witowski

A familiar story is rewriting itself in the healthcare landscape: consolidation. Nationwide, hospitals and health systems are turning to mergers and acquisitions (M&A) to buffer against financial pressures, counter new rivals like retail clinics, and defend against the growing power of insurers.

In 2023, we tracked more than 200 articles announcing health system M&As, reflecting the ongoing consolidation in the sector. Barely out of the starting gate, 2024 has already witnessed major mergers like the BJC HealthCare-Saint Luke’s Health Systems merger and the Froedtert Health-ThedaCare merger.

Despite growing regulatory headwinds, we expect strong economic incentives to keep the hospital M&A momentum alive, albeit with a few more bumps in the road. In this blog, we’ll look at some of the factors that will set the stage for a year likely to see the healthcare map redrawn through M&As.

Federal regulators take a harder look at healthcare consolidation

The Federal Trade Commission (FTC) and Department of Justice (DOJ) recently unveiled stricter merger guidelines, aiming to curb consolidation. North Carolina’s attorney general is suing hospital giant HCA after its Mission Health takeover. And just last month, John Muir Health and Tenet Healthcare called off their merger facing opposition from the FTC and California.

The message is clear: hospitals seeking to merge will face a tougher road ahead as regulators clamp down on anti-competitive deals that could inflate prices and limit patient choices. Stricter guidelines will require a deeper look at merger plans, potentially slowing some deals down.

But the impact of the new guidelines won’t be felt overnight. Regulators are still figuring out how to handle more complex structures like cross-market mergers, meaning more creative combinations, like Risant Health, could proliferate.

Ultimately, strong incentives will keep the deals flowing in the near term. COVID relief funds are now depleted. Hospitals continue to face financial strain with high supply and labor costs. It’s estimated that 600 rural hospitals are at risk of closing, or about 30% nationwide, according to a recent report. For financially stressed organizations, consolidation could be the life raft that keeps these hospitals afloat.

States with COPA laws could set the stage for bigger deals

As federal regulators tap the breaks on hospital consolidation, some states are paving the way for more mergers. Mississippi recently passed a law that exempts hospital acquisitions from state antitrust laws, joining states like South Carolina, Tennessee, Texas, and Virginia where so-called “certificate of public advantage” (COPA) laws let state agencies greenlight mergers, skirting federal scrutiny.

The intent of COPA laws is to facilitate mergers that are beneficial overall while mitigating anticompetitive concerns through state oversight. These states, particularly those in the South, could become hotbeds for M&A activity, potentially opening doors for bigger deals. LCMC Health’s recent acquisition of three HCA hospitals is a prime example. The deal was approved without meeting federal antitrust laws because of the state’s issuance of a COPA.

Strategic objectives focused on long-term growth will drive M&A activity

Regional health systems’ strategic focus on long-term growth will also drive merger activity. Squeezed by stagnant Medicare rates and powerful insurers encroaching on care delivery, health systems will prioritize M&As that bolster their bargaining position, diversify their offerings, and address specific challenges like capability or service gaps.

Think of ambitious cross-market deals like Kaiser Permanente’s proposed acquisition of Geisinger Health, which promises to expand value-based care through a new organization called Risant Health. The merger could pave the way for Kaiser to become a national player as it works to build a network of health systems in value-based contracts. After Kaiser brings Geisinger into its fold, we should know more about Risant Health’s next acquisition targets.

Kaiser’s move is also part of a growing trend of cross-market hospital mergers, or mergers between health systems that operate in separate geographic areas. With local M&As facing heightened scrutiny, cross-market deals like Kaiser’s could define future hospital consolidation.

To sum it up

Expect hospital mergers to continue at a steady pace, driven by strategic imperatives, tempered by regulatory oversight, and nuanced by regional market dynamics. As hospitals and health systems grapple with the aftermath of the global pandemic, we anticipate a spectrum of M&A deals ranging from defensive maneuvers by financially stressed hospitals to cross-market mergers by integrated delivery networks. Though regulatory hurdles loom, long-term growth will be the compass guiding these partnerships forward.

Learn more

This blog is the fourth in a series of posts exploring the 2024 healthcare trends you should care about. In case you missed our last trend, check out how digital twins are revolutionizing clinical trials. Or jump back to the beginning to read up on the trends you’re most interested in. To learn more about how Definitive Healthcare’s intelligence can help you create new paths to success, start a free trial today.