In recent years there has been a trend of increasing merger and acquisition activity in the healthcare industry. This trend will continue in 2023, with affiliations across state lines and standalone facilities joining larger established players.

The healthcare industry is in a state of constant change and evolution. Knowing the three merger and acquisition trends below is essential to stay ahead of the curve.

Mega-mergers going strong

A January report from Kaufman Hall showed that the fourth quarter of 2022, with 17 announced hospital and health system transactions in the works, "was one of the most active quarters" the firm had seen since the start of the pandemic.

There were 53 transactions in 2022 as a whole. Of the 17 announced in Q4, four met Kaufman Hall's definition of "mega merger" – with the minor party having annual revenues above $1 billion. One out of five, meanwhile, had a minor party with revenues in the $500 million to $1 billion range.

"This was the third consecutive quarter in 2022 in which the average size of the smaller party across all announced transactions exceeded $800 million," said Anu Singh, managing director at Kaufman Hall and its practice leader for partnerships, mergers and acquisitions. "As a result, the average smaller party size for the entire year reached an historic high of $852 million, well above 2021’s then-record size of $619 million."

Value-based plays

One of the main drivers of this trend is the ongoing shift towards value-based care, which emphasizes the coordination and management of care to improve outcomes and reduce costs.

This shift has increased pressure on healthcare providers to become more efficient and cost-effective, and many have turned to merger and acquisition activity to achieve these goals.

Hospitals and health systems are increasingly merging to gain scale and reduce costs. By combining resources and expertise, these organizations can improve their negotiating power with payers and suppliers and increase their ability to invest in new technologies and services.

Similarly, physicians and other providers are joining forces to coordinate care better and improve patient outcomes. Patient acquisition is the foundational requirement for effective value-based agreements.

Matchmaking for distressed organizations

We are returning towards pre-COVID-19 financials, and the organizations struggling before the pandemic are in the same predicament now. We will see consolidation among distressed hospitals in 2023.

Hospitals and health systems operating at a high level can negotiate favorable terms. Those having difficulty should get imaginative and come up with novel solutions to improve their chances of selling or drawing interest from investors. Sellers must focus on these measures in preparation for a possible sale.

To succeed, sellers must determine their motivations and decide on a plan of action. Depending on the organization's aims, acquiring new ownership could help them stay true to their current trajectory or give them all they need – resources, capital, and more – to reevaluate their competitive advantages and services offered entirely from scratch.

M&A activity in the healthcare industry remains strong, as evidenced by the recently announced mega-mergers. While some have questioned the value of these deals, they are usually driven by a desire to increase market share or achieve economies of scale.

As we enter into an era of value-based reimbursement, it is vital for hospital and health system leaders to consider how acquisitions can help them meet their goals around cost and quality. For distressed organizations, partnering with a larger organization may be the best way to ensure long-term viability.

David Chou is an accomplished technology executive with deep experience in the healthcare space in for-profit, nonprofit, academic medical center, pediatric hospital and ambulatory settings, with a focus on value-based care. He has experience leading complex organizational transformations and digital solution integrations for global and regional organizations in a highly regulated industry.