Health systems are turning to the outpatient sector for growth opportunities after hospital merger and acquisition activity took a dive to its lowest level in more than a decade.

Deals for 2021 dropped to 71, the lowest number since 2009 and fourth consecutive annual decline reported, according to healthcare advisory firm Ponder & Co. The decrease was chalked up to the COVID-19 pandemic halting planned transactions, as well as relief aid and reimbursement cut delays helping hospitals to remain sturdy.

With the risk of M&A volumes not rebounding until 2023 and the desire to expand outpatient networks, players in the market are questioning where opportunities lie and looking toward other entities than hospitals to help them grow.

One example is Tenet Healthcare, which, along with its subsidiary, United Surgical Partners International, acquired SurgCenter Development last month for $1.1 billion. The deal brings it SCD’s ownership of 86 ambulatory surgery centers and gives USPI an expanded reach as an ambulatory surgery platform and partner of multispecialty physicians, including musculoskeletal, ENT and other practices.

The centers are located in 21 states and expand USPI into Arizona, Florida and Texas, as well as deepening its stake in relatively newer markets in Ohio, Indiana, Wisconsin and Maryland. They also provide the company with a scalable entry point into Michigan.

"We are not going back to the Wild West days of the mid-nineties, where we saw 150 deals a year. Many health systems are not relying on hospital acquisitions for future growth — so much centers around the outpatient sector," said Eb LeMaster, managing director at Ponder, in a statement.

Another recent transaction was one between LifePoint Health and Kindred Healthcare, where the former acquired the latter and created a new company. Known as ScionHealth, the company is a 79-hospital healthcare system consisting of Kindred’s 51 long-term acute care hospitals and 18 of LifePoint’s community hospitals. It is expected to make an annual revenue of $3.5 billion and will provide high-quality, patient-centered acute and post-acute hospital solutions across 25 states.

Kindred’s rehabilitation and behavioral health businesses, meanwhile, will be taken over by LifePoint, along with its acute rehabilitation units, outpatient centers and post-acute facilities. This will give LifePoint around 65 community hospitals, 30 behavioral health and rehab hospitals and an additional 15 under construction, 170 outpatient and post-acute facilities and a total of 50,000 employees.

With fewer independent hospitals and smaller systems, M&A activity is limited. Bungled integration plans, diluted returns and rising regulatory scrutiny in highly concentrated markets may also be contributors to this decrease. While President Joe Biden and federal antitrust agencies are being tougher on horizontal deals like hospital acquisitions of physician practices, the law and regulatory guidelines are not as strict on vertical integration, say industry experts. As a result, outpatient acquisitions are becoming more commonplace.

Still, despite lower hospital transactions, those taking place consist of large transactions and helped buoy deal values in 2021. Some were even considered to be megamergers, in which the smaller party or seller had average annual revenues surpassing $1 billion. A recent one was that of NorthShore University HealthSystem and Edward Elmhurst Health into a nine-hospital system in Chicago with $4 billion in revenue. Announced back in September, the deal was completed just this month.

And for-profit hospital chains are also divesting some inpatient facilities in their smaller markets, like HCA, which announced this month that it acquired MD Now Urgent Care. The deal gives it 59 urgent care centers that will expand the reach of its network in Florida.

While low right now, M&A activity among hospitals is expected to rebound in the second half of 2022 and into 2023.

"The majority of Q4 announcements were from distressed sellers who had no choice but to go to market during the height of the pandemic. As financially strong sellers get to the other side of omicron at the end of Q1 and beginning of Q2 2022 and ask themselves if they might have better served their communities from a larger platform, we will see more announcements in the second half of 2022,” said Jordan Shields, a partner at Juniper Advisory, in a statement.

Ponder & Co. did not respond to HCB News’ request for comment.