DALLAS – Catholic Health Initiatives and Dignity Health have finalized merger plans and agreed to combine operations under a new name and headquarters, creating one of the nation’s largest non-profit healthcare organizations.
Englewood, Colo.-based CHI and San Francisco-based Dignity will operate from a new headquarters in Chicago under a name yet to be announced, according to a definitive agreement reported Thursday.
“Chicago is centrally located, has convenient access to all parts of the country where our ministries are located, and offers good infrastructure to support a national organization,” said Dignity communications director Lauren Davis.
The two Catholic health organizations have more than $14 billion in combined long-term debt, according to the most recent reports.
The two systems’ combined 2016 revenues would surpass those of the St. Louis-based Ascension Health, currently the largest non-profit healthcare system, according to data reported by Becker’s Hospital Review.
In an uncertain environment for U.S. healthcare, the new health system will operate in 28 states and include more than 700 care sites and 139 hospitals. The system will have about 159,000 employees and more than 25,000 physicians and other advanced practice clinicians.
“We foresee an incredible opportunity to expand each organization’s best practices to respond to the evolving health care environment and deliver high-quality, cost-effective care,” said Lloyd Dean, president and chief executive officer of Dignity.
Dean and Kevin E. Lofton, chief executive officer of CHI, will serve as co-CEOs of the new organization, officials said. The announcement came after more than a year of negotiations announced in 2016.
After a series of downgrades to CHI’s $8.6 billion of bonds and with a negative outlook on Dignity’s $5.5 billion of debt, the merger will have no immediate impact on either credit, according to S&P Global Ratings.
S&P downgraded CHI to BBB-plus with a stable outlook in March. The same month, S&P affirmed Dignity Health's A rating with a negative outlook.
“We said at the time that, as the smaller and higher rated organization, Dignity Health would likely be downgraded as its overall financial profile would be initially diluted. We stand by that assessment,” said analyst Martin Arrick. “Our rating outlook on CHI remains stable as this merger would be beneficial to its financial metrics and we would assume some financial synergies would be implemented post-merger, although many details are not yet available.”
In March, Moody’s Investors Service downgraded CHI’s long term debt to Baa1 from A3 and maintained a negative outlook. Two months earlier, Moody's assigned an A3 rating and stable outlook to Dignity Health’s $5.5 billion of outstanding debt.
Not-for-profit hospitals are facing rising costs at a time of slower revenue growth, driving lower margins, according to a Moody’s sector report in October.
“Limited pricing flexibility poses a challenge as both private and public payors reduce or slow their reimbursement rate increases,” the report said. “Small independent hospitals, particularly those in rural locations, are disproportionately affected by rising costs as they compete for labor with larger wealthier hospitals.”
To compensate, hospitals are consolidating to gain negotiating leverage with payors and to reduce costs through scale, analysts said. Mergers that are financially dilutive are credit negative, they said. But for smaller hospitals that are acquired by strong organizations, mergers were seen as credit positive.
“Rising expenses make it increasingly difficult for not-for-profit hospitals to counter slower revenue growth,” Moody’s said. “The median expense growth rate for our portfolio has accelerated for two consecutive years, increasing 6.6% in 2015 and 7.2% in 2016, and outpaced the 6% revenue growth in 2016. Higher labor, pharmaceuticals and information technology costs have weighed on hospitals.”