Healthcare merger drumbeat continues in Midwest
Nonprofit healthcare consolidation continues in the Midwest.
Earlier this month, Michigan-based Beaumont Health and Ohio-based Summa Health announced plans to develop a strategic partnership. In June, South Dakota-based Sanford Health announced it had signed a letter of intent with Iowa-based UnityPoint to form an integrated health system.
The deals continue a trend of creating regional health systems that allow two entities to share operational capabilities and care models across state lines but within a contiguous geography.
“Sanford and UnityPoint are two successful systems intent on controlling our own destiny,” Sanford chief executive officer Kelby Krabbenhoft said in a statement announcing the alliance.
The Sanford-UnityPoint combined entity would rank among the top 15 not-for-profit health systems by revenue. It would have 76 hospitals across 26 states and nine countries.
The organization would form a unified governing board while both organizations would continue to operate their respective fully integrated medical groups and maintain long-standing relationships with independent physicians, hospitals and other healthcare partners, executives said. The deal is expected to be completed by the end of 2019, subject to pending regulatory reviews. No details were released on how the systems’ debt would be handled.
S&P Global Ratings analyst Cynthia Keller said the merger is a size and scale play.
“Sanford is in several states but they are not hugely populated areas so a move into Iowa would be to more population,” Keller said. “Sanford also has a health plan and there could be some opportunity there.”
Last year, Sanford merged with the Good Samaritan Society, which provides senior care in 26 states and nine countries. Keller said that acquisition was a revenue diversity strategy for the system.
Largely because of that deal, Moody's Investors Service on Friday downgraded Sanford to A2 from A1.
“The downgrade to A2 from A1 reflects the expectation of sustained, increased financial leverage which, combined with ongoing execution and integration risks of Evangelical Lutheran Good Samaritan Society, result in less cushion of balance sheet, cash flows and operating margins,” Moody’s wrote.
“This rating reflects our recent decision to combine with The Good Samaritan Society,” said JoAnn Kunkel, chief financial officer of Sanford Health. “Sanford Health made a strategic decision to partner with the Society, and a short-term decline in the rating does not affect our strategy.”
Moody’s rates UnityPoint A1. The outlook is stable. S&P Global Ratings rates Sanford Health A-plus with a stable outlook. Sanford has about $718 million of outstanding debt and Unity Point has $1 billion outstanding.
The Beaumont Health-Summa Health merger will give Beaumont the opportunity to expand outside of Michigan into Ohio. It will also give the system access to SummaCare insurance.
"In American health care today, there are regional health systems emerging that are crossing state lines and aggregating markets," Beaumont CEO John Fox said. "The pressure we’re all under to get size of scale so we can lower unit costs, become more efficient, more affordable for the consumer is an imperative we take seriously. We’re constantly looking to not only get bigger but also better."
Moody’s analyst Lisa Goldstein said that combinations like these mean healthcare systems can create greater scale and scope, “so when they sit down with payors they have a larger voice in negotiations and more leverage can create more of a level playing field.”
Moody’s rates Beaumont’s hospital revenue bonds A1 and S&P rates the Michigan health system’s bonds A-plus. The outlook from both is stable. The system has roughly $1.5 billion in outstanding debt.
Moody’s downgraded Summa’s $350 million of debt in 2017 to Baa2 citing unexpected operating losses and higher capital spending. Summa announced in September that it was beginning a search for a potential partner or merger with another health system to help ensure long-term financial stability.
Both systems are big players in their respective markets. Beaumont is among Michigan's largest healthcare systems and includes eight hospitals and a total annual net patient revenue of $4.7 billion.
Summa Health includes a network of four hospitals, community health centers, a health plan, a physician-hospital organization, and a multi-specialty physician organization. It reports total annual revenues of $1.4 billion.
The partnership is expected to be finalized by the end of the year, subject to regulatory approval. Summa will maintain its branding, local leadership and a local board of directors. No money will be exchanged; the two systems will pool their assets, said Summa President and CEO Cliff Deveny.
Goldstein believes that Midwest will continue to see the creation of these larger regional systems. How independent hospitals are impacted will depend on their specific situation.
“If you are perhaps the last hospital standing in a ten-hospital town and everyone else has consolidated and you haven’t, that could that be an issue going forward but it is not the same issue if you have something that makes you essential to the payor or your market, without the need to consolidate,” Goldstein said.
Merger and acquisition activity for the first quarter this year continues but has seen a slight decrease, said George Huang, senior municipal research analyst at Wells Fargo. According to first quarter 2019 figures reported by PricewaterhouseCoopers, deal volume declined over the prior year and prior quarter by 21.2% and 28.3%, respectively.
“What is interesting is that the combined revenues of the deals has decreased as well,” Huang said. That trend reflects the trend of more distressed, smaller hospitals seeking an acquiring hospital to help them, he added.
“The stressed numbers have been more apparent among the small rural hospitals; 10 closed in June and that is up from three hospitals in the first half of last year,” Huang said. “In total 2018 saw 15 rural hospitals closed and that pace of closing shows the stress that this segment of the healthcare industry has seen.”
S&P analyst Martin Arrick said that as hospitals feel financial pressures they start trying to cut costs more aggressively but there are only so many costs to cut without merging with a bigger organization.
“The thing I would add there is a separate issue on rural areas they tend to be sole community providers almost by definition,” Arrick said.
In the Chicago area, independent hospitals have allowed themselves to be scooped up by systems to deal with evolving market trends and lean balance sheets, and two more are poised to follow.
Late last month the larger and higher-rated Evanston, Illinois-based NorthShore University HealthSystem said it will acquire Swedish Covenant Hospital. Swedish has had its eye on such an acquisition, having been negotiations with a handful of systems.
NorthShore had previously been in talks to join forces with Advocate Health Care, which ultimately announced a merger with Wisconsin-based Aurora Health Care in 2017. NorthShore and Swedish Covenant did not disclose terms. The acquisition still requires regulatory approval and is expected to be completed by the end of the year.
Under the proposed structure, Swedish Covenant Hospital will join the NorthShore health system and continue to operate its full-service, acute care community hospital. NorthShore which operates four hospitals in northern Illinois had $2 billion of revenues last year and Swedish, a stand-alone hospital on the north end of Chicago, generated $317 million in 2017. Swedish Covenant has about $175 million of debt.
Fitch Ratings hit Swedish Covenant with a downgrade to BBB from BBB-plus in October.
NorthShore has about $250 million of outstanding rated debt. Moody’s lowered its outlook to negative on the Aa2 rating in November. “Despite its favorable demographics, Chicago-area market dynamics, including volume declines, increased competition driven by consolidation, and the presence of a dominant commercial payer will continue to compress margins,” Moody’s wrote.
On July 17, Peoria, Illinois-based OSF HealthCare and Little Company of Mary Hospital & Health Care Centers based in the Chicago suburb of Evergreen Park announced they were in exclusive negotiations to merge. Regulatory and church sponsorship approval is needed from the boards of the two Catholic providers. Financial terms were not disclosed and the union is expected to be completed in early 2020.
OSF operates 13 hospitals. Little Company had been in the market for a larger parent and previously was in talks with Rush University Health. Acquiring Little Company will expand OSF’s presence to the Chicago area.
Ahead of an OSF sale last fall, Moody’s affirmed OSF’s A2 rating on $1.15 billion of debt. S&P affirmed its A rating. The rating reflects the expectation the system will maintain its presence as a relatively large multisite system in northern, central, and southern Illinois, and its leading market positions in several markets, Moody's said. The system was on track to generate $2.8 billion of operating revenue for fiscal 2018.
Fitch Ratings withdrew Little Company’s A-plus rating in 2015 on about $150 million of debt after a portion was refunded with privately placed debt and the hospital opted to end participation in the underlying rating process for its credit supported-floating rate debt.