CHICAGO — Two independent hospitals in Chicago's western suburbs — Elmhurst Memorial Healthcare and Edward Hospital & Health Services — are the latest to join the two-year-old national surge of not-for-profit healthcare consolidations.
Elmhurst Memorial in the suburb of Elmhurst, and Edward, which operates Edward Hospital in the far western suburb of Naperville and a smaller campus in nearby Plainfield, announced on Tuesday their intention to create a system with revenues of more than $1 billion.
Their boards last week approved the signing of a letter of intent to merge and launched a due diligence process. If they proceed and win state and federal regulatory approval, the merger could be completed by mid-year. Edward President and Chief Executive Officer Pam Davis would serve as CEO of the new system.
"The delivery of healthcare is changing rapidly. Hospitals are under tremendous cost pressure while being asked to take a much more active role in managing the overall health of patients," Davis said in a statement. "Together, Edward and Elmhurst can enhance the quality and cost effectiveness of healthcare while still maintaining our strong local community focus."
Elmhurst was founded in 1926. In June 2011 it opened a replacement 259-room acute care facility. Edward's main campus in Naperville houses a 309-bed hospital. It also operates an emergency care, outpatient surgery and cancer center in Plainfield.
The union allows Edward to extend its reach and Elmhurst to join forces with a higher-rated and more fiscally stable system. Elmhurst has $495 million of debt rated in the triple-B category and Edward has $278 million rated in the single-A category, all issued through the Illinois Finance Authority.
Moody's Investors Service earlier this month revised its outlook on Elmhurst Memorial's Baa2 rating to negative from stable, a move driven by the hospital's weak operating performance in the first quarter of 2013 and its aggressive debt and swap structure, Moody's wrote.
The hospital is challenged by its high leverage and a debt structure of which 50% is in a variable-rate mode. Its letters of credit on the floating rate debt expire in July although extensions are expected.
Its strengths include favorable cash on hand levels, a favorable service area, and manageable capital spending plans given the completion of its hospital in 2011.
Fitch Ratings last year downgraded Elmhurst Memorial's rating one level to BBB-plus based on its operating performance and put it on negative watch.
Moody's rates Edward A2 with a positive outlook. "The A2 rating is based on Edward's location in a solid demographic area, history of strong operating margins, and very good and liquid, unrestricted investment position," Moody's wrote. "These strengths are offset by increasing competition in a crowed and rapidly consolidating market, trend of modest revenue growth, relatively high variable rate debt, and expected increase in capital spending and possibly debt."
The possible union is the latest in a national consolidation trend as hospital systems seek to bolster their capital positions and trim costs as they navigate the challenges of federal health care reform. Industry participants see the consolidation trend escalating as the nonprofit sector's challenges favor larger economies of scale. Illinois has exemplified the national trend with both independent hospitals and systems joining forces.