Special Report: Healthcare M&A Predictions for 2025
Read what trends our team believes will shape the healthcare industry and M&A market next year. They share thoughts on the macro-operating environment for hospitals and trends in acute care system consolidation. Several themes emerge. Welcome to 2025.
Avoidable hospital transaction failures will continue
Casey Webb
During the past five years, more than 10% of announced hospital transactions were terminated. Based on our review of these data, the main drivers of M&A failures are predominantly process-related. Many companies engaged in rudderless negotiations with one potential partner without first establishing objectives and conducting a thorough search for a qualified partner. Other companies simply waited too long to seek a partner and were negotiating with a deteriorated balance sheet. Failures can best be avoided by setting clear objectives, engaging multiple partners to solicit competition, and communicating strengths and opportunities effectively. This is especially true when financial distress is present.
More cross-region consolidation
Jordan Shields
The trend of cross-region consolidation will continue to accelerate in 2025 as health systems look for accretive growth in the face of cost and reimbursement pressures. This is a continuation of a trend that has defined the 2020s – health systems looking for horizontal opportunities beyond market-adjacent “tuck-ins”. The most successful health systems, as measured by both clinical and financial performance, have pursued cross-region growth over the last few years. These systems have included Advocate, BJC, the Cleveland Clinic, Intermountain, Kaiser/Risant, Orlando Health, Sanford and others. While this trend is not new, but we are approaching a tipping point where systems looking for partners are prioritizing clinical and operational strength over proximity and organizations with proven solutions are increasingly open to deploying them over broad geographies.
The Rise of the Middle
Farley Reardon
With national or multi-regional acute care system transactions stealing the headlines over the last few years, my prediction for 2025 is for the growth of the mid-sized acute care systems – between $1 billion and $4 billion – through the pursuit of expansion with like-sized systems and/or strategic additions supported by a reduction of interest rates to ease access to capital and a slowdown in nationwide transactions. These mid-sized health systems, representing nearly 30% of health systems, have watched from the sidelines as large transactions have finalized and those new systems focus on integration. With operations stabilizing, utilization growing and financial markets strengthening to support access to capital, these present a meaningful opportunity for expanded clinical outreach to serve a broader demographic with additional strategic growth options for both inpatient and outpatient care sites, enhanced operating capabilities and scale through the combination of like-sized systems, and diversified risk both in the individual market and the system. As a typical challenge in transactions, like-sized, regional systems often have a similar culture to mitigate the “contrast of culture” experienced in transactions. Combined boards have the capability to establish a shared strategic plan for the expanded region with ongoing input from the local markets, which are more challenging in national expansion, with focus on growth and integration from a new viewpoint to serve the expanded region and develop a more durable and sustainable health system while the national systems settle in. My 2025 prediction is for the growth of the Middle (-sized system) that can also better offer value to systems both larger and smaller across an even wider region.
Continuing involvement by academic medical centers in mergers and partnerships
Brent McDonald
Academic medical centers (AMCs) will remain active and opportunistic participants in the current wave of mergers, affiliations and partnerships. AMCs continue to face the same headwinds as the rest of the industry but also must navigate additional complexities in meeting their tripartite missions (clinical, research and training). Activity in the last 12+ months remained strong, including transactions announced involving the University of California, UCLA Health, Duke Health, University of Minnesota, UChicago Medicine and the University of Alabama at Birmingham. The partnership and merger activity is due in part to the continued recognition by AMCs (and university affiliated health systems) that serious threats are coming from growing regional and national systems, new PE-backed ambulatory focused companies and the steady march of technology that now allows formerly complex procedures to be performed in non-AMC (or even ambulatory) settings. Further, there is an ongoing awareness that the size of the clinical enterprise and number of lives or population under influence has a strong correlation on the ability to have a sustainable academic / research mission. In addition to stabilizing its regional referral base, other advantages of growing an AMCs hospital and delivery network through affiliations include: stronger geographic coverage, better network for VBC and MCO relevancy, enhanced primary care base and increased number of convenient care access sites. The AMCs do have certain typical advantages when discussing mergers and partnerships with other hospital systems, including strong brand awareness, quality outcomes, ability to recruit staff, nurses and higher end specialties, and strong investments in technology and best-in-class EHRs that benefit care delivery. Communities and NFP boards considering transactions involving their community hospitals are often comforted by the non-profit (or governmental) AMC focus on quality clinical care and training for a targeted geography.
Distressed organizations will have difficulty finding partners
Adam Davis
Market activity in 2025 will include a sizeable number of distressed hospitals seeking partnerships, continuing a pattern witnessed in 2024. However, suitors will remain hesitant to consider these types of transactions, leaving financially struggling operators with limited options. Despite some relative stability returning to the hospital sector in 2024, operators continue to grapple with cash flow pressures, deferred capital needs and potential policy headwinds. Leadership teams and Boards often focus solely on internal operational improvement projects and wait too long to formulate alternative strategic plans. In some cases, those internal efforts don’t solve longer-term issues and are instead short-term fixes, eventually putting independent hospitals in unsustainable situations that potential partners cannot absorb. Larger systems have also had their own challenges recently and are still emerging from (or implementing) turnaround plans. Meanwhile, debt funding remains expensive, and payor environments are becoming less favorable (e.g., Aging Baby boomers are shifting from commercial insurance to Medicare), causing systems to assess distressed transactions with caution. That’s why leadership teams and Boards should complement their overall strategic vision with partnership exploration even if they’re not under immediate financial pressure. Organizations could then avoid the need for a “last resort” partnership process that leads to suboptimal outcomes. Having the option to start a partnership process from a position of strength allows independent hospitals to receive the most favorable economic and noneconomic terms from potential partners. Being proactive and continuously assessing a range of options will thus result in more sustainable and accretive partnership solutions, positioning organizations and their respective communities for success.
Quietly quitting the hospital industry
Rex Burgdorfer
The phrase is typically used to describe the practice of office workers exerting the bare minimum effort to maintain their positions – – effectively “coasting” on steroids. We’ve heard the lore of tech workers sunbathing on roofs, failing to notify managers of a “side hustle,” or simply not returning to a workplace post-Covid.
The term can also be applied to the hospital industry. The societal stakes more serious, though, than a few employees phoning it in from camper vans in the Rockies. Many health systems, especially those with clear owners, e.g., equity sponsors, religious orders, or local governments, have concluded that the health system industry is too capital intensive, too regulated, and subsists on razor thin margins. The complexity, expense, and risks of independently managing Labor, Billing, Coding, IT, Recruiting, Retention, Advocacy, and Policy mounts.
As rational economic actors, systems are purposefully divesting weaker markets, exiting certain segments, and allocating investments to alternative sub-sectors. We expect this trend to continue in 2025 and for academic medical centers and secular 501(c)3’s to continue winning an outsized-share of change-of-control transactions.
Operational Strength: Always in Style
Chris Benson
In the transformed landscape of 2025, hospitals and health systems with strong operational capabilities will continue to outpace their peers in performance and partnerships. While back-office efficiencies—such as revenue cycle management, supply chain optimization, and corporate services—remain important, they cannot match the advantages of well-managed, integrated care systems. Organizations that excel in delivering high-quality, standardized, evidence-based care by supporting their clinicians at the point of service, will stand apart from the rest.
Robust operational competency extends the runway for remaining independent and positions growth-oriented systems to attract partners by excelling in both patient care and caregiver experience. Back-office improvements alone are insufficient. Boards considering partnerships want more than financial sustainability, they want to ensure the right care for the patients and communities they serve for the long term. This work is both hard and expensive, spreading the necessary investments over a larger base pays off.
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