Mercy Health and Bon Secours talks underscore healthcare merger trend

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Ohio-based Mercy Health and Maryland-based Bon Secours Health Systems are in talks to merge.

The merger would create the fifth-largest Catholic not-for-profit health system in the country and result in a single system with $8 billion in operating revenues.

It’s the latest combination being considered in an ongoing consolidation of the healthcare sector to better manage costs through integration and service delivery and by creating economies of scale in their business operations. The new company would employ 57,000 people, including more than 2,100 doctors and specialists.

"As consumers grapple with the implications of Health Care Reform in a dynamic marketplace, Mercy Health and Bon Secours share a vision to improve the health of the communities we serve as the low-cost, high-value provider," said John M. Starcher, Jr., Mercy Health President and CEO.

In the coming months, Mercy Health and Bon Secours said they would work on a definitive merger agreement and obtain applicable regulatory and board approvals with the goal of completing the union by the end of the year. It is unclear how the joint system would address individual debt obligations.

Mercy Health has approximately $2.1 billion of debt outstanding and Bon Secours has roughly $833 million of debt.

Bon Secours owns, manages or has joint ventures in 20 hospitals. Mercy Health is the largest health system in Ohio, with 23 hospitals and 26 post-acute care facilities.

Terri McNorton, a spokesperson for Bon Secours, said that the two systems have “no overlapping geographies” so the merger isn’t expected to trigger anti-competition concerns. The Federal Trade Commission has moved to block other mergers where it feared consumer prices could be driven up because of anti-trust issues.

Cincinnati-headquartered Mercy Health has a statewide presence in Ohio and Kentucky. The system has experienced substantial growth over the past seven years with total operating revenue increasing 43% since fiscal 2009 to $4.5 billion in fiscal 2016, including a 5.1% year over year increase since fiscal 2015.

The system includes assets of $6.8 billion and nearly 500 care facilities including 23 hospitals and 26 post-acute care facilities including senior living communities, hospice programs and home health agencies.

Moody’s Investors Service rates the system A2, with a stable outlook. S&P Global Ratings rates Mercy Health A-plus, with a stable outlook. Fitch Ratings rates the system AA-minus. The outlook is negative.

All three rating agencies took action against the system in 2016 due to significant losses generated by HealthSpan Partners' insurance and physician care delivery operations, which were purchased by Mercy Health in 2013 and operated previously as Kaiser Foundation Health Plan of Ohio and Ohio Permanente Medical Group. Moody’s and S&P downgraded the rating and Fitch lowered its outlook on the credit.

Mercy Health continues to face an additional cash squeeze from collection issues related to the transition of its information technology platforms. The system will complete migration of its largest regions to new revenue cycle IT platforms by mid-2018, which, according to Moody’s, “can cause slowdowns in collections and elevate operating costs.”

Marriottsville, Maryland headquartered Bon Secours carries an A rating from S&P. The system manages, or joint ventures 20 hospitals and 27 post-acute care facilities or agencies with operations in Maryland, Virginia, South Carolina, Kentucky, Florida and New York. For the year ended August 31, 2017, operating income was $135.5 million.

The rating agency revised its outlook on the system to positive from stable in early February citing the system’s ongoing enterprise strengths and steady financial profile and said it could raise the rating by one notch if the system continued its positive volume and revenue growth.

S&P said that it could also consider returning the system’s credit to a stable outlook if operating results weaken. “While unlikely, a large debt issuance or significantly dilutive acquisition could result in a lower rating unless we believe the strategic benefits are significant and immediate,” S&P said.

Moody’s rates the system A2 with a stable outlook. Fitch rates the system A with a stable outlook.

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