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Health systems uneasy about acquiring financially weaker assets

Financially stronger health systems are hesitant about acquiring weaker hospitals or systems, an M&A trend that is expected to continue as organizations continue financial turnarounds and work to steadily improve their operating margins after a financially challenging period, according to a recent report from ratings agency S&P Global. 

Acquiring hospitals and health systems are thinking twice about taking on assets that would dilute already weakened financial profiles unless there is a particularly strong strategic purpose and clear path to turnaround. 

For example, Duluth, Minn.-based Essentia Health and Marshfield (Wis.) Clinic Health System called off plans to combine into a 25-hospital regional health system earlier this year. Marshfield reported significant operating losses in 2023 and recently laid off about 3% of its staff. Essentia barely broke even in fiscal 2023; a spokesperson for the system told Becker's that Marshfield's financial situation was a primary factor in the decision.

"We believe this could result in heightened entity distress, as challenged hospitals might have limited options for financial improvement," ratings agency S&P Global said in a recent report. "Other affiliations tied to service lines and physician-aligned relationships with larger health systems could be supportive for smaller or strained organizations." 

On the other hand, large system-to-system mergers — increasingly in noncontiguous markets — are steadily growing as executive teams pursue size and scale to offset expense pressures and for broader strategic purposes. 

However, health systems' ability to close mergers — particularly in a timely fashion — is delayed by the Federal Trade Commission and state review processes, key factors influencing sector dealmaking.

Under the leadership of Chair Lina Khan, the FTC has challenged and prevented several health system transactions from closing. Ms. Khan will lead the agency until Sept. 25.

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