Hospital M&A Activity Slows Amid Economic Uncertainties, but Operating Margins Remain Stable

Hospital and health system merger and acquisition (M&A) activity has hit a significant low point in the first quarter of 2025, with only five transactions announced. This marks a substantial decrease from the 20 transactions reported in the same period last year. Despite this slowdown in dealmaking, hospitals are maintaining relatively stable operating margins, according to recent reports from Kaufman Hall.

M&A Activity Reaches New Low

The first quarter of 2025 saw just five hospital and health system transactions, a figure that falls below even the COVID-19 pandemic's lowest point of seven deals in Q3 2021. This dramatic decline is attributed to a combination of global economic volatility and healthcare policy uncertainties at both state and federal levels.

Key factors contributing to the slowdown include:

• Potential global trade war concerns
• Proposed changes to Medicaid payments
• Uncertainties surrounding NIH research funding
• Shifts in not-for-profit financing options

The average seller revenue for Q1 2025 deals was $279 million, approximately half of the full-year 2024 average of $559 million. The total transacted revenue for the quarter amounted to just under $1.4 billion, less than half of the recent low of $3.0 billion recorded in Q1 2022.

Notably, four out of the five deals involved financially distressed entities, continuing a trend observed in 2024 when about 31% of the year's 72 announced hospital deals involved organizations facing financial challenges.

Hospital Operating Performance Remains Stable

Despite the slowdown in M&A activity, hospitals' operating performance has remained relatively stable. Kaufman Hall's February performance report highlights several key metrics:

• The median operating margin (including health system allocations) was 2% in February, down from January's 3.4% but still above the 2024 full-year median of 2.1%.
• Excluding health system allocations, the median operating margin for February was 5.6%.
• Net operating revenue per day increased by 3% from January to February and was 8% higher year-over-year.
• Inpatient revenue per day grew by 1% month-over-month and 11% year-over-year, while outpatient revenue increased by 4% and 8%, respectively.

Hospital volumes also showed positive trends:

• Daily discharges increased by 3% month-over-month and 6% year-over-year.
• Adjusted discharges rose by 4% from January and 3% compared to the previous year.
• Emergency department visits increased by 4% both month-over-month and year-over-year.

However, the increase in ED visits is "leading to challenges with ED boarding for many organizations," according to Erik Swanson, Managing Director at Kaufman Hall.

While hospitals managed to reduce their average length of stay by 2% from January to February, expenses rose to match volume increases. Total daily expense increased by 5% month-over-month and 8% year-over-year, with notable increases in non-labor expenses, particularly in purchased services.

As the pharmaceutical industry navigates these complex market dynamics, the coming months will likely prove crucial in determining whether M&A activity will rebound and how hospitals will continue to manage their operational performance in the face of ongoing economic and policy uncertainties.