Catholic hospital chains mull mega-merger; Powerful alliance would challenge for-profits

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Hospital operator Catholic Health Initiatives (CHI) (Englewood CO), which has struggled after rapid expansion and a foray into health insurance, is in merger talks with Dignity Health (DH) (San Francisco) to create one of the nation’s largest nonprofit hospital systems by revenue.

Catholic Health Initiatives and Dignity Health in merger talks, combined revenue of $27.8 billion Click To Tweet

The not-for-profit giants have signed a nonbinding agreement to evaluate “an alignment” between the systems, according to a release. A person familiar with the matter said the talks involve a merger, according to The Wall Street Journal.

The deal would combine 103 hospitals owned by Catholic Health Initiatives with 39 hospitals operated by Dignity Health. Combined revenue for the new organization would reach $27.8 billion annually, based on the most recent financial statements, says The Journal.

The proposed union is the latest megamerger among US hospital operators, both nonprofit and publicly traded. It comes as antitrust regulators have stepped up their scrutiny of such deals. CHI operates in 18 states, but not in Arizona, California and Nevada, where Dignity Health operates its hospitals.

A full merger would create the nation’s largest not-for-profit hospital company with combined revenue of $27.8 billion ahead of the $20.5 billion posted by Catholic-sponsored Ascension, according to Modern Healthcare. A CHI-DH combination would leave it trailing only Kaiser Permanente as the largest not-for-profit health system. Kaiser, which has a giant managed care plan, posted revenue of $60.7 billion last year.

The Catholic hospital operators did not disclose terms of the non-binding agreement, only indirectly referring to last month’s news that they had formed a partnership called the Precision Medicine Alliance, which the two systems called the nation’s largest community-based precision medicine program.

“The potential to align the strengths of these two organizations will allow us to play a far more significant role in transforming health care in this country,” CHI CEO Kevin E. Lofton said in a news release. “Together, we could enhance our shared ministry as the health industry transitions to a system that rewards the quality and cost-effectiveness of care.”

The statement went on to identify ways the systems complement each other. For example CHI has 103 hospitals in 18 states and focuses on clinical and home-health services in addition to research. DH “is well known for its work with innovative, diversified care-delivery partnerships.”

CHI, however, is facing some financial struggles. The company was hit by a major bond downgrade this summer and has announced plans to sell its money-losing health plan business. CHI’s debt-to-equity ratio has skyrocketed in recent years. At about 50% in 2011, it zoomed to nearly 100% in 2013 and on to 110% in 2015.

In July, Fitch Ratings lowered the credit rating of CHI by three points, citing the health system’s weaker financial profile, while A.M. Best Co. downgraded CHI’s health insurance subsidiary.

CHI posted a net loss of $568.1 million in the first nine months of its fiscal 2016, which began July 1, 2015. Health IT costs, investment losses and troubles with its health insurance company spearheaded the massive deficit. CHI’s credit rating from Fitch, which covers $6 billion of outstanding debt, now rests at BBB+, down from A+. The 9-month net loss was a significant deterioration from its fiscal 2015. For all of 2015, CHI managed just a $3.1 million operating gain on revenue of $15.2 billion.

CHI spokesman Mike Romano said talks were preliminary and he declined to discuss possible options under an alignment, according to Modern Healthcare.

The Precision Medicine Alliance will initially focus on advanced diagnostic tumor profiling in cancer patients, but will eventually expand to treating other areas of cancer and cardiac illnesses, according to a news release. The program will also build a collection of clinical cancer data that can be used to better diagnose and treat patients. The systems will integrate patient electronic health records in order to build the database.

CHI’s Lofton and DH CEO Lloyd Dean are perennially on Modern Healthcare’s list of Top 100 Most Influential Healthcare Leaders. In the release Monday, Dean said the two systems are looking to align during a time of rapid change in healthcare.

“Through a stronger strategic and financial foundation, an aligned ministry would accelerate our ability to advance our healing mission into the future,” Dean said.

CHI expanded its reach in home-health services through a $43 million acquisition in 2010.

DH is a major outpatient care operator after the $455 million acquisition of US HealthWorks in 2012, a national occupational medicine and urgent-care company, and currently operates in 22 states with 9,000 physicians, 62,000 employees and 400 care centers. DH also operates a joint venture with private-equity backed GoHealth Urgent Care to develop outpatient care centers.

Steve’s Take: These nonprofit hospital systems mentioned above are essentially invisible on the national healthcare landscape but generate a ton of revenue. And they dwarf some familiar names seen routinely in the Business Section of The New York Times.

For example, Catholic Health Initiatives generated $15.2 billion in revenue in 2015. With that much revenue, CHI would be #185 on the Fortune 500 List… larger than CBS, VISA, Viacom and Texas Instruments.

The largest non-profit hospital system, Ascension Health, generated $20.5 billion in revenue in 2015. If Ascension Health were on the Fortune 500, it would be No. 139… ahead of Tenet Healthcare (the third largest for-profit hospital system), Southwest Airlines, Starbucks and Facebook.

But a combined CHI and DH would reach about $27.8 billion in annual revenue, placing it at No. 103 on the Fortune 500… ahead of Travelers, Rite Aid, Time Warner, Community Health, Amgen and Abbott Labs.

Do I have your attention?

So, just what are these Catholic hospitals up to, anyway? In a word, “expansion.” The number of Catholic-owned or affiliated hospitals in the United States has grown by 22% since 2001, and now 1 in 6 acute-care beds is in a hospital connected to the church, according to a report released by MergerWatch.

The watchdog group found that due to mergers and acquisitions over the past 15 years, 14.5% of all acute care hospitals in the nation are now either owned by or affiliated with the Catholic Church, according to the study. In 10 US states, the number of Catholic hospitals is more than 30%.

The latest report, cited by FierceHealthcare, updates a 2013 study and adjusts the methodology for what researchers consider a Catholic hospital, adding in facilities that were acquired by secular systems but still follow religious guidelines.

MergerWatch’s goal, according to the study, is to protect patient rights through hospital mergers, with help from the American Civil Liberties Union and a number of philanthropic groups. Many hospitals connected to the Catholic Church follow directives from the US Conference of Catholic Bishops, which bans contraceptive procedures or procedures to terminate pregnancy on religious grounds.

The report found that there are now 46 Catholic-restricted hospitals that are the “sole community providers” of short-term acute hospital care for people living in their geographic regions.

“In general, Catholic hospitals provide excellent care,” Lois Uttley, director of MergerWatch and one of the report’s authors told Reuters. “Our concern is with these restrictions with reproductive healthcare.”

These hospitals do vary in how closely they follow the Catholic directives. The ACLU has taken several Catholic health systems to court on behalf of patients, with mixed results, FierceHealthcare previously reported.

Okay, at least the nonprofit Catholic systems are avoiding congressional inquiries, Justice Department lawsuits and fraud penalties–something the for-profit hospital sector can’t claim.

So let’s look at the bigger picture. I mean, let’s look at some really big numbers.

The financial benefit that not-for-profit hospitals receive from their tax-exempt status has doubled over the past decade. Yet most of those funds aren’t being spent on improving community health, a new study found.

The value of the tax exemption varies by state, but hospitals across the country received a collective $24.6 billion tax break in 2011, a recent study in the journal Health Affairs calculated. That number includes not only the direct savings from federal and state taxes, but hospitals’ ability to raise money through tax-exempt donations and municipal bonds.

Taking a look at Obamacare, the ACA set new standards that not-four-profit hospitals must meet to retain their federal tax-exempt status–including a community needs assessment that must be conducted every three years. The IRS also indicated that it will start reviewing Schedule H tax forms on a rolling basis to ensure that hospitals are providing a sufficient amount of community benefit, according to Modern Healthcare.

“It will start in waves, and my understanding is that the waves have begun,” said Nancy Murphy, who counsels nonprofit hospitals at accounting firm KPMG.

A July study in Health Affairs, using data from the IRS, found that not-for-profit hospitals spent $62.4 billion on community benefit in 2011, but that 32% of that spending went toward Medicaid payment shortfalls. Another 24% covered charity care. Spending on community health improvement totaled $2.7 billion, just 4% of the total, while donations to community groups accounted for another $2 billion, or 3%.

To the amazement of many, whose sole point of reference is Wall Street’s daily gyrations, the Catholic hospital systems are growing, and that can only mean they are wresting patients away from other systems like King Kaiser and the for-profit chains. Yes, the amount of their community benefit spending is impressive, but much of it goes toward residency programs and shoring up Medicaid shortfalls.

Steve's Take: Should we be looking at our nonprofit hospitals to address social ills? Click To Tweet

I really wonder whether we should be looking to our nation’s nonprofit hospitals to address social ills. Unquestionably, they do provide some of the best health care on the planet. But at the end of the day they are hospitals.

Some have proposed calls for Congress to eliminate the ACA requirements–mandating community needs assessments and financial aid policies while restricting aggressive bill collection–and replace them with a test of whether the dollar value of hospitals’ benefit to local communities is enough to offset the lost federal revenue from tax breaks.

How such a calculation would be made fairly, I haven’t a clue. But for now, let’s let the IRS start reviewing nonprofit hospitals’ Schedule H tax forms to ensure they are providing a sufficient amount of community benefit. Their findings should be a matter of an annual report published by a certain date and made available to the public in a press release from HHS. The first such report should be published no later than the close of the government’s fiscal 2016-2017 year, or next October 1.