Academic Medical Centers Acquire Community Hospitals to Enhance Healthcare Reach

Hospitals and health systems continue to face financial and operational pressures in the current environment. Government stimulus associated with COVID-19 has ended, access to capital markets is limited, and patients are increasingly seeking care in more convenient, non-hospital settings. In response to these challenges, many hospitals are considering strategic alternatives, including mergers with academic medical centers (AMCs) and larger health systems.

After dropping to a low of 53 transactions in 2022—down from nearly twice that level in 2019 and 2020—mergers and acquisitions (M&As) involving hospitals rose in 2023 to 83 transactions. AMCs have been increasingly active, with 21 acquisitions in 2023, up from 16 and 17 in 2022 and 2021, respectively. Notable announced transactions include:

• University of Massachusetts Health’s corporate affiliation with Milford Regional Medical Center
• University of Florida's merger with Flagler Health
• University of Kansas Health System’s acquisition of Liberty Hospital
• University of Missouri Health Care's acquisition of Capital Region Medical Center
• Oregon Health & Science University’s merger with Legacy Health

Why M&A Make Sense for AMCs

AMCs approach these transactions from a position of relative strength. As leaders in innovation, AMCs attract high-quality providers and treat the most complex patients.

In addition, AMCs often carry strong brand names and reputations in their markets. However, practicing innovative medicine and attracting top talent is costly.

According to data from Moody’s Investors Service, average operating cash flow margins for AMCs have consistently lagged those of independent community hospitals. In 2023, for example, AMC margins averaged 5.3%, compared with 6.1% for independent hospitals. And the pressure on margins is continuing. As healthcare providers continue to seek ways to lower costs, AMCs see opportunity with community hospitals.

Community hospitals have strengths and weaknesses of their own. Although they may lack scale and certain capabilities, they are an essential part of the communities they serve, and they provide some of the highest-quality care in a lower-cost setting. Yet many community hospitals are fighting for survival and have been forced to seek partners. Partnering with a regional AMC may be their best strategic option given that an AMC’s financial scale, reputation, and market wide connections can help unlock clinical and operational synergies.

Partnerships can offer benefits to both parties, extending the reach of the AMCs and, relieving capacity constraints while helping community hospitals efficiently leverage their workforce, gain benefits of scale and continue their longstanding mission. Acquiring an independent hospital can be another way to expand training programs for students in community settings. Limited clinical space has been a restraint on expanding the nursing workforce, in particular.

"Many academic medical centers have the resources to acquire community hospitals and turn them around," says Emily Abrantes, Managing Director, Fifth Third Healthcare Investment Banking. An AMC that is affiliated with a state university may be highly regarded in the local community. That can give them an advantage over out-of-state buyers, particularly in passing regulatory hurdles.

What Community Hospitals Need

Local hospitals are vital to their communities. Many have a deep sense of independence and may have been operating for decades in a town with the same name. They are often a community’s largest employer and a key economic engine. Yet these same factors can lead to decisions that undercut their viability. Determined to keep healthcare decisions local, leaders may opt not to look for strategic partners, choosing instead to cut costs by offering fewer services and otherwise limiting investment. But as their financial situation weakens, there is a limited ability to manage swings in patient volume, one-time financial impacts, or other operational challenges.

Community hospitals need to be proactive when analyzing alternatives so they can approach potential partners from a position of financial and operational strength. "There’s a risk to waiting too long to engage with a strategic buyer," says Michael Tierney, Managing Director, Fifth Third Healthcare Investment Banking. "Historically, we’d see eight to ten interested buyers for an attractive asset. Now buyers are struggling financially themselves, access to capital is limited and capital is expensive. If a community hospital is struggling financially, an AMC or other buyer may not be interested. The possibility of acquiring a community hospital is not about just adding dots on a map; any acquisition must be highly strategic."

In working with independent community hospitals who are evaluating options, Tierney advises them first to determine whether they’re at a point where partnering with a larger organization is their best way forward. "We compare key metrics with peers and determine strategic alternatives if the hospital is underperforming."

Focusing on What Matters Most

Once a potential partner has been identified, both the AMC and the community hospital need to make sure any deal will accommodate their priorities. "We work with community hospital boards to help them identify their goals for a transaction," Abrantes says. Key terms include:

• Post-closing governance
• Maintaining key service lines
• Charity care policies and/or faith-based mission
• Addressing balance sheet liabilities, including pensions
• Physician organization and medical staff relations
• Capital commitments, both routine and strategic
• IT integration

The overriding goal in all of this is to provide assurances that the hospital will continue to be a viable entity and capable of providing needed and appropriate healthcare services to the local community.

Finding Deals That Work for Both Parties

The ultimate success of transactions between AMCs and community hospitals will depend on how well the organizations continue to meet their missions. It’s too early to determine if the wave of recently announced transactions will ultimately succeed and defining success may be challenging for some. "You look at the financial health of the organization that was acquired," Tierney says. "Is it on a steady track to sustain itself and meet the care needs of its community? Is it growing rather than shrinking? Those are signals we evaluate to confirm that the hospital chose the right partner."

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