As we approach the halfway point of 2023, we thought it’d be worthwhile to examine the state of the hospital M&A market so far. Through mid-May, strategic buyers and investors announced 27 hospital deals, 16 of which were in the first quarter, according to data captured in the LevinPro HC database.

Considering the number of mergers already in the letter-of-intent stage, deal activity is on pace to beat the volume from 2022. Health systems and hospitals were battered with headwinds in 2022, such as staffing issues and operating expenses, forcing hospitals to partner with a more extensive system or network. But another challenge has been competing in the outpatient care market, which has seen significant growth due to aging demographics, rising demand and other investors pushing into the market fast. 

CVS and Walgreens have invested significant capital in the outpatient care market this past year. CVS purchased Signify Health for $8 billion in 2022 and in February 2023, it spent $10.6 billion for Oak Street Health to bolster its primary care network and services. VillageMD, a subsidiary of Walgreens, acquired Summit Health-CityMD, a provider of primary, specialty and urgent care, for $8.9 billion.

These deals from major retailers are raising flags for health systems. Revenues from inpatient services have been falling steadily over the past several years, forcing health systems to increase outpatient care services and offerings. For instance, publicly traded health systems like HCA, Inc. have focused on purchasing urgent care networks and operators rather than new hospitals over the past year. HCA struck a deal in May 2023 to acquire 41 urgent care centers in Texas owned by FastMed, and in 2022, it announced two deals in the urgent care space: Bettermed in Virginia and  MD Now Urgent Care in Florida. The latter deal was valued at $594 million, according to transaction data found in HCA’s annual 2022 report.

Another strategy for health systems has been partnering and merging with other health systems, suggesting that scale and diverse revenue streams could help stabilize an organization during harsh conditions. There have been five mergers between major health systems closed this year, but there are several still in the negotiation phase, including Froedtert Health and ThedaCare in Wisconsin and South Dakota-based Sanford Health and Minnesota’s Fairview Health Services.

The largest hospital deal of the year so far (and likely will remain so) was Kaiser Permanente’s acquisition of Geisinger Health, which comprises 10 hospitals, a health plan with more than half a million members, 25,000 employees, more than 1,700 physicians and 133 primary care and specialty clinic sites. Geisinger Health generated approximately $6.43 billion in revenue and $289.4 million in EBITDA in 2021.

Kaiser Permanente, one of the largest health systems in the country, has been under financial stress in the past few years. The organization reported $95.4 billion in operating revenue across 2022 but a $1.3 billion operating loss and a nearly $4.5 billion net loss.“Clinical staff shortages, COVID-19 care and testing, higher costs of goods and services, and deferred care drove Kaiser Permanente’s expenses beyond revenue,” said Kasier’s chair and chief executive officer Greg A. Adams in the company’s annual report for 2022.

This merger was a direct response to financial headwinds hitting the industry, and Kaiser needed a way to stabilize and push into new markets. Under the terms of the agreement, Geisinger would operate independently under a new subsidiary of Kaiser’s hospital unit after the deal closes, which is expected early next year. The subsidiary, called Risant Health, aims to acquire four or five more hospital systems and generate total revenue of $30 billion to $35 billion over the next five years. The transaction between the two not-for-profits isn’t structured as a traditional purchase (most hospital mergers are set up this way), but Kaiser is expected to provide about $5 billion in funding to Risant Health. Geisinger Health will develop Risant Health’s strategy and operational model. The combined health system would generate more than $100 billion in revenue.

Some health systems and hospitals are working more slowly, acquiring local and regional physician groups and other providers across the healthcare spectrum. Sutter Health, a 23-hospital system in Sacramento, California, is in talks to form a strategic partnership with Sansum Clinic, one of the oldest physician groups in the state. According to its website, Sansum has 20 locations and more than 300 providers across various specialties. Deals like this help health systems increase market penetration and diversify revenue streams.

Facility-based and inpatient care will remain important in the future for many systems and providers, but without a robust portfolio of services in the outpatient care market, overall revenues and margins will only tighten. M&A activity highlights that organizations are moving into new spaces, which should keep the rest of 2023 busy with deal announcements.