Global Healthcare Transactions Series: How COVID-19 Impacted Transactions in the United States

June 17, 2021

After a sluggish year in 2020 for mergers and acquisitions among hospitals and health systems, 2021 has shown renewed vigor and is poised for considerable transactional activity.

When the COVID-19 pandemic erupted in the United States in Q1 2020, hospital executives were obligated to shift their focus to a multifaceted operational response to COVID-19, and as a result deprioritized planning for long-term transformation of their business models. Specifically, many health systems had to contend with a liquidity crunch due to the collapse of elective procedures, while at the same time confronting higher lab, supply, and personal protective equipment costs, as well as relentless demands on hospital staff to respond to COVID-19.

And although the adverse financial impact of the pandemic on healthcare providers was tempered by a combination of targeted relief under the CARES Act, Paycheck Protection Program (PPP) loans, and a resumption in many states of nonessential medical procedures in Q2 2020, smaller health systems and independent hospitals that entered the pandemic without substantial liquidity, geographic reach, or clinical depth experienced potentially long-term financial and operational adverse impacts as a result of the challenge of responding to COVID-19.

COVID-19’s Impact on M&A and Returning to Normalcy

Perhaps ironically, in light of these observations, there were fewer announced merger and acquisition (M&A) transactions in Q1 2021 than the corresponding period of 2020. According to an analysis by Kaufman Hall, there were 13 announced hospital/health system transactions in Q1 2021—less than half the number in Q1 2020. And hospital divestitures (both for profit and nonprofit) dropped from 16 in Q1 2020 to 7 in Q1 2021. This may be explained in part by the fact that closing on an M&A transaction is typically the culmination of months, if not years, of negotiation and planning, and thus the deals announced in each of Q1 2021 and Q1 2020 reflect the vigor of the M&A market during 2019 and 2020, respectively, and in fact, Q1 2020 had been off to strongest start in four years.

In perhaps a better metric of relative M&A activity through the pandemic period, according to Kaufman Hall, full-year 2020 M&A transactions numbered 79, down from 92 in 2019. Interestingly, according to Ponder & Co., the number of transactions involving an independent hospital increased from four in Q1 2020 to nine in Q1 2021, perhaps reflecting the impact of the pandemic on balance sheets, operational strength, and strategic vision. In addition, the average size of a health system M&A deal has zoomed from roughly $172 million in Q1 2020 to $676 million (the third highest in the last 10 years) in 2021.

With COVID-19 considerations waning, hospitals and health systems will return to strategic transformation initiatives for a number of different reasons. Healthcare providers that exited COVID-19 with strong balance sheets or minimal disruption from the pandemic will be positioned to capitalize on opportunities created by divestitures by other organizations; they may also be sought as merger partners by other well-capitalized acquirers. Health systems will likely be considering transactions that offer opportunities for regional concentration (as opposed to building a national or multiregional network), as the impact of responding to the COVID-19 pandemic has reinforced the thesis that regionalization improves the value of those services where higher volumes are associated with better quality.

In a similar vein, health systems may well look to enter new markets and offer new services that expand their continuum of care (for example, urgent care retail networks), while disposing of noncore assets (for example, skilled nursing, home health, labs, post-acute care facilities)—through either outright sales or partnerships with specialty service providers to ensure patients have access to the full continuum of services.

Following that theme, the key differentiator among healthcare providers will be the ability to identify core business strengths in order to build resiliency in the face of industry disruption and market shifts. With the goal to improve quality of care while taking advantage of economies of scale, large nonprofit hospital providers will look to consolidation and partnerships for revenue diversification and geographic expansion opportunities, in large part because it is anticipated that a greater proportion of reimbursement will come from lower-rate government programs.

The aging population exacerbates this trend as the baby boomers shift to Medicare and there is an increase of consumers moving to Medicaid coverage due to the fallout from the COVID-19 pandemic. These same large health systems will use consolidation to increase top-line revenue, net income, and unit profitability, while adding clinical and technological resources to draw patients for complex, high-revenue procedures and build up capabilities in nonhospital settings that are operated by nontraditional providers.

The pandemic has proven to be a catalyst for hospital systems to strengthen intellectual capital resources to be nimbler and to respond to different modes of providing care more efficiently, including implementing telehealth, developing new clinical protocols, and rebuilding supply chains.

Antitrust Enforcement Shows No Trend in Slowing

Antitrust enforcement in the healthcare sector has shown no signs of slowing in recent years, even against the backdrop of the COVID-19 pandemic. The Federal Trade Commission (FTC) has continued to challenge horizontal mergers of healthcare providers that the agency believes may lessen competition. In February 2020, however, the FTC faced a setback when its challenge to a proposed merger between two Philadelphia-based hospitals was rejected in federal court on the grounds that the agency failed to support its narrowly drawn geographic market.[1] The case highlights the difficulty the FTC can face when seeking to challenge mergers in densely populated areas.

Nonetheless, the FTC remains active in challenging mergers with one other active case to prevent a healthcare provider merger in Bergen County, New Jersey, and one merger in December 2020 in Memphis, Tennessee, that was abandoned after the FTC challenged it. In June 2020, the FTC and US Department of Justice (DOJ) issued new Vertical Merger Guidelines that cover combinations between companies in different segments of the supply chain. The guidelines were updated to modernize the FTC and DOJ’s methodologies for evaluating vertical mergers and focus on identifying ways that a vertical merger may (1) raise rivals’ costs or allow a combined entity to foreclose its rivals, (2) allow access to competitively sensitive information, or (3) otherwise enable coordinated interactions among competitors. The FTC’s recent challenges of hospital mergers and revised Vertical Merger Guidelines will be significant as healthcare providers evaluate potential combinations. In addition, Congress is beginning to turn its focus to consolidation in the healthcare industry and on May 19, 2021, held a hearing on hospital consolidation. It is still too early, however, to assess what, if any, impact on enforcement policy congressional interest will have.

Antitrust enforcers and private litigants have increasingly focused investigations and litigations on alleged wage-fixing and no-poach agreements among competitors in the healthcare arena. In December 2020, the DOJ, which has responsibility for criminal enforcement of the antitrust laws, filed its first criminal charges relating to wage fixing in healthcare when it charged an owner of a therapist staffing company with engaging in a conspiracy to suppress wages of physical therapists and physical therapist assistants who provide home healthcare. In January 2021, DOJ criminally indicted a corporate owner of surgical facilities alleging that it agreed with two unnamed healthcare companies not to solicit each other’s senior-level employees, i.e., a no-poach arrangement. DOJ officials have forecasted in various public speeches that the agency intends to aggressively pursue wage-fixing and no-poach agreements. Plaintiffs’ lawyers representing current or former employees have likewise challenged such agreements and have filed follow-on civil litigation after DOJ’s January indictment. We anticipate that this activity will continue and that investigating these potential risks will be increasingly significant as part of any diligence for a combination or an acquisition.

Finally, the Biden-Harris administration has the potential to reshape the FTC’s leadership, which could eventually impact the agency’s enforcement priorities in healthcare. On January 29, 2021, Joseph Simons, a Republican appointee and former chair, resigned, and Rohit Chopra, a Democrat appointee, has been nominated to the Consumer Financial Protection Bureau, although it is unclear when he will leave the FTC. On June 15, 2021, Lina Khan, an academic who was appointed by President Biden and who has been critical of “big tech,” was confirmed as the third Democrat commissioner. In a somewhat surprise move, President Biden appointed Lina Khan as chair of the FTC shortly after her confirmation. It is too early to tell how Lina Khan will approach healthcare given her recent confirmation. President Biden will have additional opportunities to appoint up to two new commissioners when Rohit Chopra steps down and when Rebecca Kelly Slaughter’s term expires in 2022. New appointees with a focus on healthcare could have a meaningful impact on the agency’s approach toward the healthcare industry.

Anticipated Uptick in Bankruptcy Filings

After three consecutive years of significant increases in healthcare industry Chapter 11 filings, in particular those related to facility-based care, healthcare industry filings declined in 2020 as compared to the prior year. In 2020, hospital filings fell by roughly half, year over year, and bankruptcies of skilled nursing facility operators dropped by 81%. This downward trend in filings can be attributed to COVID-19-related government aid to avoid hospital and nursing home closures in the middle of a global pandemic. Nonetheless, as the impact of the pandemic stabilizes, these stop-gap measures may be inadequate to bridge the significant loss of revenue engendered by people choosing to forgo or delay elective procedures and by a decline in enrollment in nursing home care. A dearth of elective surgeries, typically more profitable than COVID-19 treatments, might be compounded by anticipated state and local government budgetary constraints that would result in slower Medicaid and Medicare payments rendering the healthcare stimulus payments made this year insufficient to avert a financial crisis for many facility-based care facilities.

In the coming year, these COVID-19-related pressures, combined with existing prepandemic uncertainty surrounding the Affordable Care Act and general competitive and operational challenges, are likely to cause an increase in bankruptcy filings, restructurings, and bankruptcy sales of facility-based healthcare facilities, unless a facility is so critical to a community that local governments have no choice but to step in to avoid a closure. As an alternative, companies can consider an out-of-court restructuring, which can include converting facilities in exchange for re-tenanting or sales, cash payment and debt reduction from lessees, and other out-of-court solutions.

How We Can Help

Morgan Lewis provides companies around the world with integrated legal guidance related to all types of corporate transactions. We work seamlessly together, around the globe, to advise and represent healthcare entities, including hospitals and healthcare providers, digital health companies, life sciences and technologies companies, employers, investors, and other key stakeholders.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

North America
Janice Davis (Dallas)
Zachary Johns (Philadelphia)
Ryan Kantor (Washington, DC)
Glen Siegel (New York)
Mark Stein (Boston)
Sandra Vrejan (Boston)

Asia Pacific
Todd Liao (Shanghai)
Bernard Lui (Singapore)
Vanessa Ng (Singapore)

Dr. Joachim Heine (Frankfurt)
Paul Ranson (London)

[1] For additional background on this decision, see FTC Loses Preliminary Challenge to Tie-up of Two Philadelphia Healthcare Networks, Morgan Lewis Health Law Scan (Dec. 16, 2020).