Health system mergers, acquisitions likely in growing markets

Texas, Arizona, Florida and Idaho are home to some of the fastest-growing cities in the country, and hospitals and health systems in those metropolitan areas may be merger or acquisition targets next year.

Eight of the 15 fastest-growing large cities from July 2020 to July 2021 were in Arizona and Idaho and seven were in Florida, Tennessee and Texas, according to the latest U.S. Census Bureau data. The population in each of these cities, which include Georgetown, Leander and New Braunfels in Texas; Queen Creek, Buckeye, Casa Grande, Maricopa and Goodyear in Arizona; Fort Myers, North Port and Port St. Lucie in Florida; Meridian, Caldwell and Nampa in Idaho; and Spring Hill in Tennessee, grew between 5% and 10.5% during that time period, mirroring broader population growth trends in the South and West over the past decade.

Population growth is one of several criteria health systems consider as they mull mergers and acquisitions. Generally, and particularly among the commercially insured population, combining health systems can boost top-line revenue, improve recruitment efforts and expand service offerings.

CEOs seeking merger partners are also identifying gaps in specialty care that will be in high demand as the population ages, reimbursement trends among commercial insurers and state governments, an organization’s reputation and the market share of potential competitors.

“The southern states are attracting a lot of people and health systems will try to find a way in,” said Rick Kes, senior healthcare analyst at accounting firm RSM, noting significant growth in the Houston area. “It might be harder to enter a growing market, but some health systems are going to be looking for partners.”

Advocate Aurora Health and Atrium Health completed their merger in early December, combining operations in Wisconsin, Illinois, North Carolina, South Carolina, Alabama and Georgia. The $27 billion combined organization is headquartered in Charlotte, North Carolina, a metropolitan area that has grown about 20% over the last decade, according to census data.

“The notion that it will be in Charlotte makes perfect sense for a variety of reasons: the whole energy of Charlotte and the growth market that it has,” Advocate Health co-CEO Jim Skogsbergh said in an internal message to employees after the deal was announced in May. Co-CEO Eugene Woods, based in Charlotte, will take the helm in mid-2024.

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Health systems in Arizona are trying to keep up with population growth by adding capacity and services, similar to other rapidly expanding markets throughout the country. The city of Queen Creek, in the Phoenix metropolitan area, grew 8.9% from 2020 to 2021, trailing only Leander and Georgetown in Texas in year-over-year population growth. Phoenix Children’s is trying to keep pace with demand by building a new facility in Glendale, Arizona—which will provide inpatient care, an emergency department, an outpatient surgery center and a multispecialty clinic by 2024—as well as a freestanding emergency department and specialty clinic in Avondale that will open next year. Earlier this year, Phoenix Children’s opened a physical therapy clinic in Avondale.

The population of the West Valley, a region that encompasses one of the fastest-growing counties in the nation in Maricopa County, is projected to increase at twice the national rate through 2026. The pediatric population is estimated to jump from roughly 400,000 in 2021 to nearly 500,000 by 2030, and Phoenix Children’s is investing more than 
$225 million in capital spending to add services, the health system said.

“More than 60% of the state’s population is in Maricopa County,” said Robert Meyer, president and CEO of Phoenix Children’s.

Phoenix is one of the least-concentrated hospital markets in the country, according to Health Care Cost Institute data. Dallas-based Steward Health Care acquired its fifth facility in Arizona in April with the purchase of Abrazo Mesa Hospital in Mesa, located just east of Phoenix.

Steward has also been active in Florida. The health system purchased five hospitals across Florida’s Miami-Dade and Broward counties from Tenet Healthcare Corp. in 2021. Steward added its sixth South Florida hospital in April, when it purchased the former Miami Medical Center property from Nicklaus Children’s Health System. The hospital has been closed since 2017, and Steward plans to turn the space into an adult inpatient facility.

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South Florida is home to some of the fastest-growing cities in the country like Fort Myers and Port St. Lucie. While the southwestern Florida market has minimal competition and may be more difficult to enter, Miami is among the most competitive metro areas, according to HCCI data.

Population growth can interest or disqualify a merger target, but it’s not the sole factor, said Nathan Ray, who leads the healthcare M&A practice at consultancy West Monroe.

“More of a factor is gathering provider groups and the ability to bring specialties to existing health system locations so they are seen as the best and newest,” he said. “The growth of specialty physician groups invariably follows population swings.”

While hospitals in high-growth markets can boost access to patients and potential employees, organizations will also have to spend more to meet the growing patient base. But the benefits outweigh the drawbacks, said Kevin Holloran, head of Fitch Ratings’ nonprofit healthcare credit analysis group.

Local economics will become an even more important factor in determining a hospital’s financial strength, he said.

Still, health systems may think twice about entering a highly concentrated market. The Federal Trade Commission has challenged several hospital transactions this year, ultimately killing the deals. Systems are also facing growing scrutiny from attorneys general concerned about an out-of-state entity wielding too much control.

Sioux Falls, South Dakota-based Sanford Health and Minneapolis-based Fairview Health Services announced plans in November to merge, prompting Minnesotans to reach out to Attorney General Keith Ellison (D) with concerns about charitable assets going out of state. Ellison will coordinate several public meetings on the transaction in early January.

Regulatory scrutiny can extend a transaction’s due diligence and review period by more than a year, said David Jarrard, president and CEO of consultancy Jarrard.

“Time kills deals,” he said. “The longer it takes, the value of the investment drops.”


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