I wrote an Industry Insights article last year about large health system mergers
on the heels of the announcement that behemoths Advocate Aurora and Atrium
Health were coming together. That transaction closed in December of 2022
and since then, we have witnessed numerous other “mega-mergers,” creating health systems with
well over $5 billion in revenue.
With the operating environment for hospitals becoming even more challenging, is getting bigger the solution?
Before we answer that though, let’s take a brief look at the large mergers that have occurred over the past few years.
In 2021, Spectrum and Beaumont in Michigan announced they were coming together to create a $15
billion revenue system now known as Corewell Health. Intermountain and SCL Health came together
to create a $15B system; Illinois systems NorthShore University Health and Edward-Elmhurst
Healthcare ($5B); in Pennsylvania, Jefferson Health closed on its merger with Einstein Healthcare
Network ($8B); Piedmont Healthcare + University Health Care + 4 HCA hospitals in Georgia ($5B);
and North Carolina-based Novant Health closed on its merger with New Hanover Regional ($6B).
In 2022, the keynote merger was Advocate Aurora and Atrium Health coming together to create a
$27 billion multi-state system. There were also other sizeable combinations such as the University of
Michigan Health and Sparrow Health ($7B), South Dakota-based Sanford Health and Minnesota-based Fairview Health ($14B), though that merger has since been called off, Wisconsin’s Marshfield
Clinic and Minnesota’s Essentia Health ($5B), and Wellstar Health and August University Health in
Georgia ($6B).
So far in 2023, the most notable is Kaiser Permanente’s acquisition of PA-based Geisinger Health,
which will take the combined system to over $100 billion in revenue. Other mega-mergers include
BJC Health and St. Luke’s Health System in Missouri ($10B), Froedert Health and ThedaCare in
Wisconsin ($5B), and most recently, Oregon Health & Science University and Legacy Health ($7B).
So why are these systems merging?
For starters, there is the benefit of geographic and revenue diversification. Some markets are more
challenging than others, with diversification across a larger footprint helping to balance the combined
systems. Plus, scale allows the systems to more effectively manage risk. With the need to compete
in a value-based care world, health systems must operate in markets that are large enough to be
effective.
Of critical importance, and another key driver behind these mergers, is the enhanced ability to invest
in technological capabilities. It is important to note technology investments cannot be funded through
traditional tax-exempt debt and as technology plays a more important role in the delivery of
healthcare, not-for-profit systems must make investments to remain competitive. AI, data security,
revenue cycle, innovation, information sharing, etc. are all necessary for the successful delivery of healthcare. Furthermore, not every health system can source, invest, or build the right technology on its own. By combining, systems improve upon their ability to lower their per unit cost of investment in technology.
There is also the people. Human talent is a sought-after resource for hospitals these days and the business of running hospitals has
only gotten tougher. Not every health system can attract the best leaders. By merging, health systems can leverage the capability set
from across the organization to more effectively manage the business.
Another reason is the enhanced capital access. As rates rise and lenders tighten standards, bigger is better; and larger balance sheets
with greater assets and security enhances borrowing capabilities. However, capital access does depend on financial performance, so it
requires earnings creation. The jury is still out on the back-office savings created by these mega-mergers, but over time, with effective
leadership, the right technology, and the necessary scale, achieving synergies must be a motivating factor.
But do mergers actually achieve these goals? I have not yet found an independent study to answer this question as many megamergers are recent and there are many variables that influence the analysis. While an n of 1 would not be acceptable to my actuarial
wife, there are examples that show promising signs. In my home state of NJ, the 2016 merger between Hackensack and Meridian is
notable. Leading up to the merger, Hackensack had $1.7 billion in revenue and was averaging 9% operating EBIDA margins, 150 days
cash on hand, and 1x cash to debt. Meridian had $1.6 billion in revenue and was averaging just over 11% operating EBIDA margins,
240 days cash, and 1.4x cash to debt. Post-merger, the combined system now has $6.6 billion of revenue and not taking into the
account the recent swings during and post-COVID, was averaging 11% EBIDA margins, 270 days cash, and 1.6x cash to debt. For the
combined Hackensack Meridian Health System, 1+1 > 2. They have grown faster, plugged weaknesses, improved their balance sheet,
all while continuing to make investments.
There are many reasons why large systems are pursuing mergers and why we expect to see more. And one of these mega-mergers
could create another competitor to the national for-profit operators like HCA or the large catholic systems like Ascension,
CommonSpirit, Providence, or Trinity.
HENRY KOTULA 