Tide of healthcare consolidation continues

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Chicago-based 10-hospital Northwestern Memorial HealthCare and independent Palos Health are exploring a merger, the latest in a wave of consolidations that some sector experts believe will only accelerate amid pressures posed by the COVID-19 pandemic.

The two will conduct due diligence; the union is subject to review by the boards of each system and requires state and federal regulatory approval.

A merger would give Palos, a community-based independent system which serves the south suburbs, access to a prestigious system that often captures top health care rankings. Northwestern would benefit by broadening its reach into the south suburbs. Northwestern operates 10 acute care, rehabilitation, and behavioral hospitals in Chicago, the northern, northwest and western suburbs.

“As a member of Northwestern Medicine, Palos Health will join Chicago’s premier integrated academic health system and have access to groundbreaking clinical trials, research, and leading clinical programs,” Northwestern Chief Executive Officer Dean Harrison said in a statement announcing the proposal Friday.

Northwestern Memorial HealthCare's flagship hospital in downtown Chicago

It’s too early to say what will occur with Palos’ debt or that of the obligated group, officials said.

Northwestern’s flagship is located in downtown Chicago and Palos Health operates its main hospital in Palos Heights with another campus in Orland Park. Palos recorded $394 million in total operating revenues in fiscal 2019. Northwestern recorded $6 billion of revenues for fiscal 2019.

Palos previously had explored a merger with Loyola Medicine, which it had established a strategic partnership with in 2015. Loyola is a member of Trinity Health, one of the country’s biggest not-for-profit Catholic healthcare systems. The two announced a letter of intent to merge in January 2019 and then cancelled talks in May 2019. No reason was given, but their affiliation continued.

In the Chicago area, independent hospitals have allowed themselves to be scooped up by systems to deal with evolving market trends on volume, federal healthcare reforms and now the pandemic, where the benefits of leveraging economies of scale has grown more heightened. Evanston, Illinois-based NorthShore University HealthSystem is acquiring the independent Swedish Covenant Hospital in Chicago.

System mergers also are continuing. Illinois-based Advocate Aurora Health — which operates the largest systems in Illinois and Wisconsin — is seeking a union with Michigan’s largest system: Beaumont Health.

The sector was hard hit by the pandemic due to increased personnel and equipment costs and the loss of revenue that came with mandates to halt elective procedures and surgeries in order to treat COVID-19 patients. Most services have resumed and the balance sheet impact has eased for some, although future disease spikes remain a concern. Federal aid helped soften some of the wounds.

Palos carries a AA-minus from Fitch Ratings reflecting “the system's very strong net adjusted capital related ratios, sound position in a stable but competitive service area, and expectation of continued” good operating margins and manageable capital spending plans.

“While PCH's financial performance through the most recently available data has not yet indicated any significant impairment attributed to the coronavirus pandemic, material changes in revenue and cost profiles are expected to occur across the sector as economic activity suffers and the impact of government restrictions are seen in future financials,” Fitch wrote in affirming the rating in May. “Fitch expects the system to weather these challenges and revert back to historical operating performance.”

Palos has $340 million of debt and a strong liquidity position, with $902 million of unrestricted cash and investments that provide 872 days cash on hand.

Palos Health and Northwestern are exploring a merger.

Northwestern carries ratings in the double-A category. The system had $1.75 billion of long term debt at the close of fiscal 2019. Northwestern acquired Centegra Health System in 2018, expanding its holdings by three hospitals.

In affirming the system’s Aa2 rating last year, Moody’s Investors Service said it expects “NMHC will grow its prominent market position in the broader Chicago region because of its strong brand, favorable locations and affiliation with Northwestern University's Feinberg School of Medicine.”

The system opened the year with liquidity covering 420 days cash on hand and held 392 days liquidity as of the end of May, which rose to 419 days when counting an advance Medicare payment for $412 million. The system held a $1.2 billion operating cash balance and an untapped $100 million credit line and $122 million of available commercial paper line as of June 20, according to an investor presentation made in July by Chief Financial Officer John Orsini and Vice President of Finance Leah Hobson.

The system has reported 6,700 confirmed COVID-19 cases, with a 94.3% survival rate for inpatient treatment. Patient activity had returned to 95% of pre-COVID-19 shutdown as of July 21.

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