Amid the broader economic landscape of volatility and uncertainty, hospitals and health systems have slowed down their dealmaking with just five new transactions announced during the year’s first quarter, according to a recent report.
The tally is a low point for the sector in recent years, even coming below the third quarter of 2021 when seven hospital deals were announced during the height of the COVID-19 pandemic, wrote Kaufman Hall in a report released this week. For reference, there were 20 transactions announced during the first quarter of 2024.
“At the global level, this slowdown coincides with a period of unusual volatility and economic uncertainty surrounding the possibility of a full-scale global trade war, driven by the imposition of new tariffs by the Trump administration and the prospect of retaliatory tariffs imposed by affected nations,” the advisory firm wrote in its report. “At the national level, and specific to healthcare, are a flurry of policy proposals at the state and federal levels that may affect Medicaid payments, [National Institutes of Health] research funding, not-for-profit financing options and more.”
All but one of the recent quarter’s deals had a to-be-acquired entity that was facing financial distress, a continuation of a trend the firm highlighted in 2024 when about 31% of the year’s 72 announced hospitals involved financial distress. Three of the five deals involved a divestiture or portfolio repositioning.
“What Q1 2025 data is showing is that those transactions that are moving forward are those that must move forward to save struggling organizations,” Kaufman Hall wrote.
Accompanying the low dealmaking volume was a reduction in the size of the announced deals. Without any “mega mergers” in which a seller has $1 billion or more in annual revenues, the average seller revenue for the quarter was $279 million—about half of full-year 2024’s $559 million average.
“Combined, the small number of transactions and small average seller size produced total transacted revenue of just below $1.4 billion, less than half of the recent low of $3.0 billion recorded in Q1 2022,” the firm wrote.
Kaufman Hall said it still believes there’s appetite for dealmaking—particularly among those who need to find a buyer in order to survive—but that “resumption of more normal patterns of M&A activity will depend on greater certainty around the many factors that are unsettling decision-making today.”
Hospitals' median February operating margins remain stable
In regard to recent hospital operations performance, Kaufman Hall pointed to the stark differences between the sector’s top and bottom performers as ongoing fuel for dealmaking. Within the nationwide hospital data making up its February performance report, also released this week, the firm said it saw a 44.6% spread in margins between the 5th and 95th percentiles, and a 17% spread between the 25th and 75th percentiles.
But, taken as a whole, the monthly report paints a picture of continued margin stability and services demand ahead of anticipated policy upheaval.
The single-month median operating margin—when including health system allocations for the cost of shared services—was 2% in February, down somewhat from January’s 3.4%. Year to date, hospitals’ median operating margin was 2.5%, which remains above the 2024 full-year median of 2.1%.
Excluding health system allocations put hospitals at a 5.6% single-month median operating margin for February. Calendar year to date median margins were 6.1%, just above full-year 2024’s 5.7%.
Hospitals’ revenues and volumes were also up from January to February and remain well above their tallies from February 2024.
Month over month, net operating revenue per day was up 3%, inpatient revenue per day was up 1% and outpatient revenue per day was up 4%. Year over year, net operating revenue per day was 8% higher, inpatient revenue per day was 11% higher and outpatient revenue per day was 8% higher.
On the latter, the firm noted that widespread outpatient revenue’s growth is slowing while inpatient revenue is speeding up.
“This indicates that rapid outpatient growth in the last few years may have reached its peak,” the firm wrote.
For hospital volumes, on a month-to-month basis, daily discharges increased 3%, adjusted discharges increased 4% and ED visits increased 4%. Year over year, those gains were, respectively, 6%, 3% and 4%, with Kaufman Hall Managing Director Erik Swanson warning in a statement that the ED visit increases are “leading to challenges with ED boarding for many organizations.”
Hospitals managed to reduce their average length of stay by 2% from January to February, though the metric remains flat year over year. Observation days also made up a smaller share of total recorded patient days both month over month (-6%) and year over year (-9%).
Spending rose to match the volume increases, though hospitals lost some ground on efficiency across their nonlabor expenses.
Month over month, total daily expense rose 5%, and on a per adjusted discharge basis by 2%. Per adjusted discharge labor expense remained flat while non-labor rose 5%, which was comprised of a 4% cut to drug expenses, flat supply expenses and a 5% rise in purchased service expenses.
Compared to February 2024, total daily expense was up 8% overall and 5% per adjusted discharge. Labor expense per adjusted discharge is still up 3% over last year while nonlabor expense per adjusted discharge was up 6%, as fueled by higher supply (5%), drug (4%) and purchased service (10%) spending.
Kaufman Hall, which is owned by healthcare data and improvement company Vizient, releases monthly reports built on operating data from 1,300 nationwide hospitals, as collected by Strata Decision Technology.