Mergers and acquisitions in Q1 reflect market volatility and economic uncertainty surrounding tariffs and potential policy changes from the new administration, according to a Kaufman Hall Mergers and Acquisitions Quarterly Activity Report.
The firm described the result as a "chill" on healthcare decision-making.
Only five transactions were announced in the first quarter, said Kaufman Hall. This is the lowest number in recent history, below the COVID-19-era low point of seven announced transactions in Q3 2021.
The sizes of the transactions were low, as well, with no "mega-mergers" announced – mergers in which the smaller party has annual revenues in excess of $1 billion. The average size of the smaller party, measured again by annual revenues, was $279.3 million. This is roughly half the average seller size of $559 million recorded for 2024, and well below the recent high in average seller size of $852 million in 2022.
Combined, the small number of transactions and small average seller size produced total transacted revenue of just below $1.4 billion, less than half the recent low of $3 billion recorded in Q1 2022.
There was one for-profit acquirer in Q1, one religiously affiliated acquirer, one acquirer that's the nonprofit foundation arm of a for-profit entity and two other nonprofit acquirers (one independent and one governmental).
WHAT'S THE IMPACT
Hospital volumes remained strong in February, particularly in emergency departments, though expenses continued to rise, and outpatient revenue slowed as inpatient revenue grew, according to a separate Kaufman Hall Flash Report.
Examining financial data from more than 1,300 hospitals, the firm calculated their average operating margins dropped from 3.4% in January to 2.5% in February, but still remained above 2024 averages, meaning hospital performance remains relatively stable.
The average operating margin dropped 11% from January to February, but grew 5% year-over-year (YOY), while the average EBITDA margin decreased 7% month to month but grew 1% YOY.
A 10% growth in supply expenses per calendar day was the contributor to a rise in overall expenses, which were up 8% YOY. Drug expenses were up 9% over that time, as were nonlabor expenses, while labor expenses grew 6% over that timeframe.
In terms of volume, observation days dropped 9% YOY while discharges per day were up 6%, with average length of stay remaining more or less the same. Visits to emergency departments increased 4% over the course of the past year.
THE LARGER TREND
A Kaufman Hall blog post from Managing Director Lisa Goldstein published in January showed that more nonprofit hospitals experienced credit downgrades than upgrades in 2024, though the difference between the two is not as great as it has been in previous years.
Goldstein reviewed the rating actions published by three credit agencies – Moody's, S&P and Fitch – and said they collectively downgraded 95 facilities and upgraded 37 in 2024, compared with 116 and 33, respectively, in 2023.
Many of the downgrades occurred because expenses exceeded revenue growth, she said, despite the decline in use of contract labor and a recession of volumes back to prepandemic levels.
Most of the upgrades were due to lower-rated hospitals becoming merged into higher-rated systems, while many downgrades were due to outsized increases in debt-to-fund growth strategies.
Jeff Lagasse is editor of Healthcare Finance News.
Email: jlagasse@himss.org
Healthcare Finance News is a HIMSS Media publication.