M&As to pick up steam in 2023 as hospitals adapt to tougher conditions

Health system mergers and acquisitions dipped in the second half of 2022 as hospitals looked to address urgent challenges including staff shortages, inflation and the rising costs of labor, supplies and energy. 

Coinciding with those macroeconomic pressures, health systems also faced a sterner regulatory environment last year, with the Federal Trade Commission applying greater scrutiny to large transactions. 

Some planned hospital deals were scrapped last year after the FTC threatened to get involved, including Nashville, Tenn.-based HCA Healthcare and Dallas-based Steward Health Care System's proposed five-hospital deal in Utah and Providence, R.I.-based Lifespan and Care New England's planned merger.

This year, however, deal advisers expect mergers and acquisitions to pick up steam across the healthcare sector as private equity firms and corporate entities look to capitalize on investments in a financially turbulent market, but when that will happen remains unclear, according to The Wall Street Journal

According to Kaufman Hall's December "National Flash Hospital Report," most hospitals are operating on narrow or negative margins, which is likely to force even some of the largest health systems to consider mergers and acquisitions, joint ventures and non-traditional partnerships this year.

While health systems look for strategic partnerships with like-minded organizations, outside investors are expected to continue to disrupt the healthcare sector this year. 

But buyers and sellers want more certainty about the pace of future rate increases from the Federal Reserve, as well as data showing inflation continuing to subside after hitting a 40-year high in September.

"As interest rates go up, valuations are coming down," particularly for rapidly growing companies that aren't generating free cash flow, Suzanne Kumar, a vice president in Bain and Company's M&A practice, told the Journal. Ms. Kumar said that is particularly true in the tech and healthcare sectors, where deals for high-growth companies are most common.

Amazon, the second-largest U.S. company by revenue, is the biggest threat to health systems' core business, according to a Health Tech Nerds survey. Survey respondents predicted that Amazon will target retail and digital health company acquisitions such as Color, Walgreens and Smile Digital Health this year and Optum will continue to be a top acquirer in the healthcare sector.

While the volume of healthcare deals decreased in 2022, some large transactions were announced and completed, particularly in health IT.

On the hospital front, well-managed health systems will look to affiliate with other providers, especially those in other regions to avoid antitrust concerns, according to a January KPMG report. In-market deals will continue to boost access and efficiency for systems looking to scale.

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