Another independent Illinois hospital scrapping stand-alone status

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The north suburban Chicago-based NorthShore University HealthSystem will extend its reach further into the northwest suburbs with the acquisition of independently operated Northwest Community Healthcare.

The two announced the agreement for Northwest Community to join the five-hospital NorthShore system Wednesday and said they expect to close the transaction later this year pending state and federal regulatory review.

Under the agreement, NorthShore would become the sole direct or indirect corporate member of NCH and its affiliates, according to a bondholder notice filed July 8.

Northwest Community Healthcare's flagship hospital will join the NorthShore University five-hospital system.

“Our shared emphasis on community-focused care coupled with a commitment to strengthening physician relationships were two of the discerning factors in deciding to pursue this opportunity,” NCH chief executive officer Steve Scogna said in a statement. The hospital said it reached the agreement after an 18-month “strategic assessment” by its board. Scogna would remain in place and the NCH board would remain intact.

The union marks the latest in an ongoing wave of not-for-profit healthcare sector consolidation. The COVID-19 pandemic which has strained hospital operations as they struggle to cover higher personnel and equipment costs amid revenue losses from cancelled elective surgeries and procedures over the spring is expected to fuel further unions in an attempt to leverage economies of scale.

General strains on the sector from federal healthcare reform mandates to uncompensated care which have only intensified due to the pandemic are especially acute for stand-alone hospitals. Few remain in the Chicago region as many have already joined larger systems or closed.

For NorthShore, the union extends its hospital footprint into the northwest suburbs. The system currently operates five hospitals, four in the north suburbs and one on the north side of Chicago. NorthShore acquired the Chicago hospital – Swedish Covenant – in early January. It previously was a stand-alone, independent facility.

For the 509-bed NCH which is located in the suburb of Arlington Heights, the marriage allows it to join a wealthier system with improved access to capital to finance investments and a broader array of specialists.

The two did not announce intentions on NHC’s debt structure.

“The parties have made no decisions as to whether any action might be taken with respect to outstanding indebtedness of the parties. The parties will, however, evaluate options to optimize the indebtedness, which may or may not include the consolidation of obligated groups,” the disclosure filing read. Any refinancing or restructuring would be dependent on market conditions, legal limitations, management considerations and other factors.”

NHC finished its last fiscal year with more than $600 million in revenues and NorthShore about $2.2 billion.

Moody’s Investors Service rates NHC A2 with a negative outlook. The rating affirmed in January 2019 reflects the hospital’s “solid market position in its key service area, with generally favorable demographics.”

Moody’s warned of the stand-alone pressures. “Although market share is currently stable, NCH will continue to face risk as a small-sized independent player amid several large, highly-consolidated systems in the Chicago- area market,” Moody’s said. “The negative outlook reflects our view that NCH will continue to face pressures amid a highly fluid and competitive market.”

Moody’s rates NorthShore Aa3 with a stable outlook following a downgrade in February. “The downgrade to Aa3 from Aa2 is due to growing competition from larger health systems, especially in recently acquired Swedish Covenant Health's very competitive market, and revenue constraints from growth in Medicare and Medicaid. These fundamental changes in the market landscape and payer mix, along with the initial dilutive impact of Swedish, will result in modest margins for several years even considering expected improvement,” Moody’s said.

NorthShore benefits from a leading market position in an attractive service area. NorthShore this spring refinanced Swedish Covenant and executed a new master trust indenture.

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