CommonSpirit and Essentia exploring deal on some North Dakota and Minnesota facilities

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Duluth, Minnesota-based Essentia Health would acquire one large and 13 smaller critical access hospitals in Minnesota and North Dakota from Chicago-based CommonSpirit Health under a preliminary agreement.

The two systems announced Friday that they took the first step toward the ownership change by signing a letter of intent. The terms were not disclosed in the announcement. “It is the hope of both organizations that the due-diligence process moves forward smoothly, and the CHI facilities could join Essentia by the summer,” read a statement.

The facilities operate under the Catholic Health Initiatives, or CHI, brand and include the full-service tertiary hospital St. Alexius Medical Center in Bismarck, North Dakota. CHI and Dignity Health merged in 2019 to create CommonSpirit.

“CommonSpirit wants patients in this region to have access to a strong network of rural and tertiary hospitals, primary and specialty care, and telehealth services,” said Cliff Robertson, senior vice president for CommonSpirit’s Midwest division. “Essentia Health is well-positioned to integrate these facilities into a continuum of care, while carrying on the Catholic heritage and mission of these facilities.”

“This is an exciting opportunity to extend our passion for excellence in rural health care to additional communities,” David C. Herman, Essentia’s chief executive officer said in a statement.

A rendering of the new Essentia campus that will open in 2023. The system is working to acquire 14 CommonSpirit hospitals.

Essentia Health operates 14 hospitals and other healthcare facilities in Minnesota, Wisconsin and North Dakota with $2.2 billion of revenues reported in the fiscal year that ended June 2020. CommonSpirit operates 139 hospitals across 21 states with revenues of nearly $29.6 billion.

Like most healthcare systems, the two have struggled to manage through the COVID-19 pandemic’s impact, although federal funds from various relief packages have helped tamp down the impact. The systems did not comment on the motives behind the deal.

For CommonSpirit, the transfer would allow it to shed smaller facilities that have been especially vulnerable to the COVID-19 pandemic’s fiscal blows to the sector and allow it to focus on other long-term strategic plans. The system has expanded in other areas including the recent merger of its Washington-based CHI Franciscan with Virginia Mason Health System that formed Virginia Mason Franciscan Health, a jointly-operated subsidiary of CommonSpirit.

Rural hospitals generally headed into the pandemic in weaker shape than many in urban areas. Last year, 14 rural hospital had been shuttered by mid-August, bringing to 172 the number closed over the last decade, according to Kaiser Health News citing data from the University of North Carolina-Chapel Hill.

For Essentia, the additions would expand its existing footprint in Minnesota and North Dakota and contribute to its leading market share within that footprint. It’s also viewed as having expertise in operating critical access hospitals. Essentia had recently divested of two critical access hospitals in Idaho and acquired an additional critical access hospital in Minnesota.

Ahead of a more than $2 billion issue last October, rating agencies affirmed CommonSpirit’s triple-B ratings.

The new entity landed ratings last year of BBB-plus from S&P Global Ratings and Fitch Ratings and Baa1 from Moody’s Investors Service. All three rating agencies assign stable outlook to CommonSpirit.

The pandemic is blamed for a fiscal 2020 $550 million operating loss. The system received $1.3 billion in federal CARES Act funding. The system has said its longer term goal — to achieve an 8% operating margin post-pandemic — remains a strategic target.

CommonSpirit eventually aims to achieve $2 billion in savings but the 2023 goal might not be achieved because of the pandemic, Fitch Ratings said.

Essentia carries ratings in the single A category. S&P Global Ratings early last year affirmed the system’s A-minus and stable outlook.

Fitch affirmed the system’s A-minus rating and stable outlook last September “despite a period of sharp pandemic-driven losses in the tail end of fiscal 2020.” The system which implemented cuts and furloughs estimated the negative fiscal 2020 impact of the pandemic at $190 million. It received $113 million from CARES.

“The system adapted quickly to the coronavirus outbreak, transitioning to expand the use of its telemedicine platform and making sizeable expense adjustments to stem losses during the initial lockdown period,” Fitch said. The system expects to open a renovated Duluth campus in 2023.

The pending transaction marks one of the first among not-for-profit healthcare sector acquisitions and mergers to be pursued this year. While the sector was concentrated on managing the pandemic last year it “did not substantially alter hospital mergers and acquisitions,” according to an analysis published Monday by hospital and health system consultant Kaufman Hall.

A total of 79 deals were announced, down from 92 a year earlier but it was also marginally higher than a decade low in 2010 of 74. The firm also expects that the pandemic could bring about shifts in the thinking that now drives some merger and acquisition activity.

“While this report focuses on M&A activity between hospitals and health systems, we also anticipate significant growth in partnerships among and between other healthcare verticals. Even as health systems divest non-core assets in areas such as skilled nursing, home health, behavioral health, laboratories, and post-acute care, these divested assets may be replaced by partnerships with specialty service providers to ensure health system consumers maintain access to a full continuum of services,” the report read.

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