Building a Stronger Foundation: The Impact of M&A on Hospital Restructuring

Mergers and acquisitions, commonly known as M&A, are becoming increasingly common in the healthcare industry, particularly within the hospital sector. As hospitals strive to adapt to the changing healthcare landscape, many are turning to M&A to strengthen their financial position and improve the quality of care they deliver.

A report from Kaufman Hall documented a total of 65 healthcare organization mergers and acquisitions from last year, surpassing the 53 filed in 2022. A significant number of these transactions were from financially distressed healthcare organizations. Smaller hospitals are not the only ones that are seeking partnerships, larger organizations are also pursuing them.

Causes of Financial Distress in Healthcare

• Shortage in Supplies: A shortage of hospital supplies results in price increases. In response, hospitals seek alternatives, necessitating additional staff training and leading to increased expenses.
• Shortage in Healthcare Workers: The onset of the pandemic resulted in healthcare workers leaving their jobs, leading to costly contract labor and the unavailability of certain services.
• Inflation: Inflation affects all aspects of healthcare, from basic costs to medical equipment, which comprise a significant portion of healthcare organizations’ revenue.
• Low Amount of Payment: Although the costs of essential items needed for hospitals to operate continuously increase, they cannot easily raise prices to compensate for these costs.
• Investment Constraints: High-interest rates are currently affecting cash flow, asset values, and transactions.

Benefits of M&A on Hospitals

• Cost Reduction: Through M&A, healthcare organizations reduce expenses by increasing hospital scale, lowering the cost of capital, and improving negotiations with suppliers.
• Relieve Financial Challenges: Healthcare mergers and acquisitions prevent financially struggling hospitals from filing for bankruptcy or closing, thereby helping small healthcare facilities maintain their operations.
• Enhanced Quality Care: M&A can help healthcare organizations provide better quality through upgraded services and additional staff or medical personnel from the acquired hospitals.
• Increased Access to Healthcare: M&A prevents the closure of financially struggling hospitals, saving them from bankruptcy and enabling them to remain in operation. This ensures continued accessibility to care for patients in the hospital’s local area.

Challenges and Risks

• Workplace Challenges: During mergers, organizations frequently encounter workplace challenges such as integrating different work cultures, managing workforce changes, and maintaining employee engagement and retention throughout the transition.
• Due Diligence: Mergers and acquisitions require careful legal and financial checks to identify risks, uncover hidden problems, and determine whether the deal is financially sound. Failure to conduct due diligence can result in financial losses and legal troubles.
• Post-Merger Integration: Merging organizations is complex and requires proper change management. It involves restructuring, aligning processes and systems, and harmonizing goals and objectives to ensure a smooth transition and achieve expected benefits.
• Reimbursement and Payments: Mergers and acquisitions can affect the reimbursement and payment methods of healthcare providers. They must navigate complex reimbursement and payment systems to maintain financial stability and ensure continuous care.
• Uncertainties: M&A in the healthcare industry is also subject to uncertainties. Factors such as regulatory and policy changes, as well as economic shifts, can impact the success of these transactions.

Mergers and acquisitions play a significant role in shaping hospital restructuring, resulting in improved efficiency, enhanced services, and increased financial stability. By successfully navigating the complexities of M&A, healthcare organizations can establish a stronger foundation for long-term success.

Dive into the intricacies of distressed healthcare restructurings and learn from experts on navigating the new normal in our webcast: Distressed Healthcare Restructurings: Navigating the New Normal