Health systems might need to add new ingredients to their M&A recipe

By Wendy Gerhardt, senior manager, Deloitte Center for Health Solutions, Deloitte Services, LP

Health system merger-and-acquisition (M&A) strategies haven’t changed much over the years, according to nearly a decade of research conducted by the Deloitte Center for Health Solutions. While consolidation will likely continue in the sector, we expect health systems will broaden the scope of their acquisition targets.

Health systems have been following the same M&A recipe since at least 2010 as they expanded their size to strengthen market positions, gain efficiencies, and build tools for population health and value-based care. Many markets have a dominant local health system, smaller hospitals that have merged, or a national player that is trying to move in.

Over the next 10 years, we expect traditional M&A recipes will be updated as the health sector moves closer to Deloitte’s vision for the Future of Health^TM where more care is delivered outside of traditional health care settings. New market pressures will likely drive health system executives to seek M&A targets that go beyond brick and mortar hospitals, clinics, and physician offices. Few health systems have all of the ingredients needed to expand their care-mode transformation recipe books. As a result, some might need to diversify portfolios to include virtual offerings and partnerships to gain capabilities that allow more care to be delivered outside of the hospital. Health system leaders should also consider non-vertical forms of M&A that capitalize on the shift from inpatient to outpatient settings and help diversify their asset portfolios.

Health systems could face some regulatory headwinds as they try to expand their hospital portfolios. Xavier Becerra, President Biden’s nominee to lead the US Department of Health and Human Services (HHS), had a reputation for scrutinizing hospital consolidation when he was California Attorney General. If confirmed, his new role would give him influence at a national level.¹

What M&A trends can we expect over the next ten years?

Our latest study indicates that consolidation will likely accelerate over the next ten years. The continued shift to services outside of the hospital—combined with population trends and financial challenges—will likely drive transformation.

By 2030, we expect that:

• Shrinking demand will mean smaller and fewer hospitals: Our research indicates that inpatient hospital revenue could fall by 35%, and demand for hospital beds could shrink by 44% (median estimates). This decline in demand is expected in every market. Of the 390 metropolitan statistical areas (MSAs) across the United States, 61 are most likely to see high levels of consolidation.
• M&A will continue: Over the past few months, we have seen health systems merge in the Southeast (Atrium Health and Wake Forest Health System²) and the Northwest (Virginia Mason Health System and CHI Franciscan, part of CommonSpirit Health System³) with an eye toward innovation. We expect that once the dust settles from the COVID-19 pandemic, more health system executives will reassess their market and financial positions and consider consolidation.
• Health systems will look different: As the industry recovers from the pandemic, we expect a new type of health system will emerge. We are already beginning to see it take shape. There are now nearly 1,000 urgent care centers in the US, most of which have been opened or acquired by hospitals and health systems.⁴
• More care will take place at home: The adoption of virtual health increased substantially between 2019 and 2020—even after a decline from its height in the spring and summer of 2020. Interest in hospital at home delivery—through partnerships between hospitals, technology companies, and home health agencies—has increased significantly over the past several months.⁵

What should health system executives consider?

As we discussed in our research on the hospital of the future last year, executives should work to expand their business model beyond the four walls of the hospital toward a broader delivery system of outpatient care, urgent care, retail clinics, and virtual offerings. Here are three strategies executives should consider before they move forward:

• Determine an optimal asset portfolio that aligns with the market’s shift toward care delivery and supports the organization’s long-term strategy.
• Develop a buy/build/partner analysis to fill in gaps in existing capabilities, including non-inpatient care delivery services and businesses that generate revenue outside of traditional health care settings.   
• Maximize and fully integrate the organization’s current assets, including legacy acquisitions. 

The COVID-19 pandemic created significant financial challenges for many hospitals, and M&A could be essential for survival. Now is the time for health system executives to dust off their M&A recipe books and fold in new strategies that mitigate risks, deliver care in innovative modes, and puts the organization on a path toward the future. 

Endnotes:

^{1.  HHS role gives Xavier Becerra new tools to challenge healthcare consolidation, Modern Healthcare, December 7, 2020}

^{2.  Atrium Wake Forest Baptist seal merger forming $11.5B, Healthcare Dive, October 9, 2020}

^{3. CHI Franciscan, Virginia Mason ink definitive agreement to combine, Becker’s Hospital Review, December 28, 2020}

^{4. Urgent care centers eclipse 9,200 driven by Optum and hospital systems, Forbes, December 12, 2019}

^{5. Pandemic pushes expansion of 'hospital-at-home' treatment, Modern Healthcare, August 20, 2020}

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