Hospitals push for mergers amid financial struggles

The One Big Beautiful Bill Act includes almost $1 trillion in Medicaid funding cuts, which will likely lead to hospitals experiencing long-term revenue losses and higher costs from uncompensated care. Changes to the Affordable Care Act are also expected to cause more people to become uninsured or underinsured.

As hospitals' financial difficulties grow, some, especially independent hospitals or small regional systems, are seeking out mergers with larger health systems to help them fund much-needed infrastructure improvements and service expansions and keep up with rising expenses.

"Many smaller hospitals lack the capital to put the right technology in place, let alone expand service lines," said Brad Boyd, management consulting principal at consultancy BDO. "They need these transactions to remain competitive."

At the same time, state regulators have become more stringent in their reviews of healthcare mergers, with several states passing new laws that broaden regulators' oversight authority and the number of deals they review. This has led to an extended review process that could potentially jeopardize deals for some struggling hospitals.

For example, Santiam Hospital & Clinics recently told the Oregon Health Authority that it needed an emergency exemption state review of its proposed merger with Salem Health since waiting for a review to be completed could force the hospital to close. If Salem does not acquire Santiam by Aug. 1, Santiam will become insolvent.

Commentary

According to Morgan Haines, VP of margin transformation practice at Optum Advisory*, "hospital mergers are increasingly being viewed as a lifeline, not a growth strategy."

"As Medicaid funding pressures intensify and uncompensated care rises, many independent and rural hospitals simply don't have the capital needed to invest in technology, infrastructure, workforce, and service expansion," Haines said. "The question isn't whether change is needed — it's whether organizations can move fast enough to survive."

In addition, not every struggling hospital will benefit from a merger, "In some markets, a full merger may make sense," Haines said. "In others, ambulatory transformation, service line redesign, partnership models, or alternative site-of-care strategies may be more sustainable. The goal should be preserving access and improving long-term viability — not simply completing a transaction."

"When small hospitals struggle, we need to be more creative and more dogged than simply asking for the local hospital system to sustain its offerings of inpatient care," said Barack Richman, a law professor at George Washington University.

Overall, the "next wave of hospital transactions won't be won in the boardroom; they'll be won through operational execution," Haines said. "As financial pressures mount, the organizations that move quickly, integrate effectively, and realize measurable performance improvement will be the ones that emerge stronger on the other side."

*Advisory Board is a subsidiary of Optum. All Advisory Board research, expert perspectives, and recommendations remain independent.