While average hospital margins stabilized last year, consolidation trends show health systems are still facing significant financial challenges.
In 2024, the percentage of transactions with a financially distressed hospital hit an all time high and the average annual revenue of the distressed hospital inched up from $219 million in 2022 to $401 million last year, according to a new report from Kaufman Hall. The previous record was set in 2023.
The profile of "mega merger transactions" is also changing. Previously, mega mergers were between two organizations with similar revenue, but in the last year there were multiple instances of the smaller party merging with a significantly bigger one.
"Mega-mergers used to be between organizations of similar size, but that changed in 2024 to smaller organizations merging with organizations that are significantly larger," said Anu Singh, managing director in the mergers and acquisitions practice at Kaufman Hall. "While these may not all involve financially distressed organizations, it does suggest that large organizations are not immune to financial and operational challenges — a trend to monitor in 2025."
Five observations from the report:
1. Of the 72 transactions, 62.5% included a divestiture, which is more than double the year prior. Most years it's 30 to .40%, according to the report.
2. The transactions with the smaller party having an "A-" or higher credit rating reached an all-time low, dropping from 12.3% in 2023 to 2.8% last year.
3. Total transacted revenue generated for financially distressed hospitals was $8.8 billion in 2024, up from $2.3 billion in the previous year. When coupled with the increased revenue of the financially distressed hospital, "these figures suggest that the days when financial distress was largely concentrated among smaller critical access or community hospitals may be behind us."
4. High expense growth continues to challenge hospitals. Kaufman Hall noted in October the median net operating revenue per calendar day grew 20% over 2021 while total expenses per calendar day was up 19%, and around half of hospitals and systems fell below this mark.
5. The next year may usher in a new regulatory environment if federal antitrust enforcement agencies change leadership and take a less aggressive stance to hospital mergers during the Trump administration than the Biden administration. The other factors Kaufman Hall sees affecting future mergers and acquisitions include:
- C-suite executive retirement bringing in the next generation of leaders
- Transactions seeking new capabilities or market access
- Transformative change and creative joint ventures
The report notes: "Transactions that seek scale for scale’s sake have been replaced by a focus on strategic transactions that add new capabilities or provide access to new markets. Nonetheless, we increasingly see relatively large systems seeking partnerships with even larger organizations, a sign that industry pressures are expanding their range."