Hospital dealmaking remained quiet during the second quarter with sell-offs from larger health systems comprising half of newly announced deals, per a recent report.
Just eight hospital transactions were announced from April through June, a slight bump over the prior quarter’s five deals but still lower than historical trends, Kaufman Hall wrote in a recent review.
In part because divestitures made up half of those deals, the average size of the selling party’s annual revenue across the quarter was $175 million, again lower than the second quarters of the past eight years. Similarly, total transacted annual revenue for the quarter was $1.4 billion, another low mark compared to both last year’s $10.8 billion and the past several years.
The advisory firm attributed the slow pace to the policy uncertainty amid the new administration and Congress and said it anticipates hospital dealmaking will now gradually pick up as the landscape settles and health systems have a hard number for the Medicaid cuts passed in President Donald Trump's "big, beautiful bill."
“With some of the uncertainty on the economic impact of federal policy changes now resolved, hospitals and health systems have the clarity and visibility needed to refocus their strategy and transformation efforts,” the firm wrote in its second-quarter report. “This may lead to an interesting dichotomy in health system M&A activity, with the acceleration of organizations looking for partners in response to new financial challenges, but a careful and measured approach being taken by well-positioned health systems.”
Though fewer hospital transactions were on the table this quarter, health systems were still working on new partnerships and affiliations to address rural health challenges and the ongoing shift toward outpatient-centered care.
For the former, Kaufman Hall highlighted a slew of new plans to transition existing or shuttered facilities as rural emergency hospitals, a so-far underused designation intended to preserve critical access to care.
On health systems’ growing non-acute focus, the firm pointed to Ascension’s multibillion-dollar deal to acquire AmSurg and its 250 outpatient ambulatory surgery centers as well as Cleveland Clinic’s partnership with ambulatory surgery center operator Regent Surgical.
“We see significant activity around new partnerships and affiliations intended to drive the transformation of U.S. healthcare delivery,” the firm wrote. “From rural communities to urban centers, the need for better, more efficiently delivered and lower-cost access to care is propelling and accelerating a shift of focus for nearly all hospital and health system types in the market.”
Hospitals' operations, margins dipped in May
Kaufman Hall’s quarterly M&A report landed alongside its monthly hospital performance benchmarks, which showed a slight decline in operating margins among the nation’s hospitals from April to May.
Kaufman Hall’s single-month median operating margin—when including health system allocations for the cost of shared services—was 2.2% in May, down slightly from April’s 2.2% and well under January’s 3.8% high point. Year to date, hospitals’ median operating margin was 3.3%, which remains above the 2024 full-year median of 2.2%.
Excluding health system allocations landed hospitals at a 5.8% single-month median operating margin for May. Calendar-year-to-date median margins were 6.9%, so far staying ahead of full-year 2024’s 5.8%.
On revenues, hospitals saw from April to May a 3% reduction in daily inpatient revenue, a 4% drop in daily outpatient revenue, a 4% decline in daily net operating revenue and a 1% decline in net patient service revenue per adjusted discharge. Year to date, those metrics were, respectively, up 8%, 8%, 7% and 1% from the prior year.
The revenue dips were accompanied by volume declines, according to the report. From April to May, daily discharges slipped 1%, daily adjusted discharges dropped 2%, daily ED visits dipped 1% and daily operating room minutes fell 6%. Year to date and year over year, daily discharges were up 4%, daily adjusted discharges increased by 5%, daily ED visits rose 2% and daily operating room minutes were flat.
Average length of stay stayed even from April to May and remains 1% below the prior year’s first half.
Hospitals’ expenses, though up from last year, fell nearly across the board in May both in absolute terms and on a per adjusted discharge basis. Specifically, daily total expense dropped 3% month to month, daily nonlabor spend by 4%, daily labor spend by 2%. Per adjusted discharge, total expense fell 1%, nonlabor expense declined by 2% and labor expense increased 1%. Also of note, while supply expense per adjusted discharge declined 2% from April to May, drug expense per adjusted discharge rose by 1%.
“Volumes, margins and expenses are down slightly, yet hospital performance remains largely stable,” Erik Swanson, managing director and leader of the firm’s data and analytics group, said of the monthly numbers. “The outlier is prescription drug expenses, which increased notably. Hospitals must carefully consider how to manage their drug spend.”
Kaufman Hall, which is owned by healthcare data and improvement company Vizient, builds its monthly reports on operating data from 1,300 nationwide hospitals as collected by Strata Decision Technology.