Merger and acquisition activity among providers is still going strong in the healthcare arena but with different drivers providing new motivation for them, according to a Kaufman Hall report.

The average size of sellers by annual revenue for 2019 was $278 million, remaining above recent historical levels but not at the all time high of $409 million set in 2018. The largest one to take place in 2019 was Atrium Health’s acquisition of Wake Forest Baptist Health in North Carolina, a deal which helped raise total transacted revenue for the second quarter of the year to $11.3 billion, according to Kaufman Hall.

The 2019 M&A in Review: In Pursuit of the New Bases of Completion analysis indicates that increased pressure from existing and new competitors continues to push hospitals and health systems to enter into partnerships like this. But rather than entering into them for the aggregation of assets, providers are instead seeking to transform their business models to better meet changing consumer demands and government regulations.

“As organizations enter into new competitive dynamics, the need for new or optimized resources, know-how and services will drive more market collaboration,” said Anu Singh, managing director at Kaufman Hall, in a statement. “The transactions we're seeing, for the most part, are being driven more by strategic considerations than purely financial concerns. It's a trend we expect to see continue in 2020, and also accelerate in terms of more cross-vertical partnership activity.”

Announced transactions in total rose from 90 in 2018 to 92 in 2019, noted Singh. Partnerships between financially strong or market-defining health systems continue to prosper, with three announced transactions categorized as "megamergers", a term used to describe when the smaller partner earns more than $1 billion annually in revenue. Eleven involved smaller partners who had annual revenues between $500 million and $1 billion, while five were ones in which the smaller partner had a credit rating of A or higher.

Partnerships continue to diversify in form and participants due to increases in competition, says the report, with payers, health systems, physician practices and digital health companies looking to align with legacy healthcare delivery organizations, establish more consumer access points, develop lower-cost sites of care, and improve consumer convenience and access. Not-for-profit systems continue to lead as the acquirer in deals, accounting for 80 percent of transactions in 2019.

Partnerships across state lines or in different countries are also still strong, with providers seeking more opportunities to grow, diversify their bases of operations, and add more efficient assets to their existing operations. Four cross-state transactions were recorded in 2019, a similar figure to that of 2018.

The motivations behind these trends, however, are no longer solely financial in nature, but now partially out of a desire to answer the changing demands of consumers. Many are now questioning how they conduct their businesses, influenced by competitive approaches, such as that of CVS Health. The U.S. healthcare company launched last year the first of its HealthHUB locations and intends to create 1,500 in total. It also opened the first “Walmart Health” location to offer primary care, dental care and behavioral health services.

Another demand is friction-free, convenient and transparent experiences. Previous research by Kaufman Hall found that only 36 percent of consumers would choose a primary care physician for a minor injury or illness sustained by their children, while 72 percent reported wanting an alternative option if they had to wait more than one day for an appointment. In addition, legacy healthcare organizations are facing increasing pressures from changes by CMS in its 2020 Outpatient Prospective Payment System (OPPS) final rule, which mandates that "consumer friendly" price information be made publicly available by providers by 2021. This, along with a desire among insurers, risk managers and employees to change high and inconsistent costs of legacy systems, is contributing to M&A activity out of a desire to reduce total cost of care.

“Any of the observed transactions indicate more strategic rationale for partnerships, relative to acquisitions for additional scale or size,” said Singh. “The former include organizations entering entirely new markets, seeking partners with complementary resources, intellectual capital or capabilities. In other cases, the structures of the combinations themselves are exhibiting the desire of parties to collaborate in a manner that is most appropriate for their goals and that are breaking free from traditional acquisitions.”

Only 20 percent of sellers were reported to be financially distressed, the same percentage recorded in 2018, according to Kaufman Hall.