Provider scale strategies: The evolving landscape

M&A remains an important option for health systems, but targets and strategies are shifting. While traditional economies of scale will continue to be a strong stimulus for M&A, providers will likely seek and achieve value creation much differently in the future.

Although merger announcements from several large health insurers garnered most of the headlines last year, provider M&A deal volume remains strong. On average, in the past five years, more than 70 deals were struck annually (see Exhibit 1 in PDF), up from 40 per year in the previous five years.

Deal value also has increased (Exhibit 2 in PDF). Average annual revenues per transaction, which were $136 million in nominal dollars between 2005 and 2010, rose to $250 million in the subsequent five years.1 Average annual revenues per acquired hospital also grew, from $90 million to $150 million. The growth in deal value reflects the overall increase in provider consolidation, not just the impact of a few especially large deals. The three provider megamergers that occurred in 2012 and 2013 accounted for less than 20% of the aggregate revenues ($107 billion) of all health systems targeted for M&A between 2010 and 2015.2

In the past several years, health systems have also been growing through non-M&A deals such as joint ventures and partnerships. These capital-light deals are often struck not only to achieve scale benefits but also to improve care coordination, attract and retain physicians, or better position the organization for value-based contractual arrangements (e.g., accountable care organizations).

The increase in provider deal activity has been prompted by a range of industry 1changes, including payor consolidation, the emergence of narrow networks, rising regulatory pressures and compliance costs, and shifts in where care is delivered. Today’s health systems recognize a growing need for network adequacy if they are to capture greater share in a risk-based world, and are beginning to appreciate that they cannot rely solely on traditional economies of scale if they are to withstand the pressures on their profitability and balance sheets. However, a comprehensive analysis of recent provider deals reveals that the landscape is evolving in several important ways, with important implications for the future of health system M&A. In particular, three trends have emerged from the most recent wave of consolidation:

  • Midsize systems—those with $1 billion to $5 billion in revenues—are now in the lead as both buyers and targets, and they are focusing significantly on in-market scale.
  • The number of small health systems (those with less than $1 billion in revenues) is dwindling, and most that remain are not ideal acquisition targets.
  • Health systems are becoming increasingly deliberate about what they hope to achieve through M&A and have pursued strategic and opportunistic acquisition patterns that go beyond just adding more acute care beds.

In this article, we discuss these trends, their implications for health systems, and key issues provider executives should consider. 

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  1. All of the numbers cited in this paragraph are in nominal dollars. However, the increase in M&A deal value remains strong even when the numbers are adjusted for medical cost inflation (a compound annual growth rate of 3% between 2005 and 2015).
  2. The mergers between Community Health Systems and Health Management Associates, Tenet and Vanguard, and Trinity and Catholic Health East had aggregate target revenues of about $17 billion.