CHICAGO — Palos Health in suburban Chicago and Loyola Medicine have signed a letter of intent that could lead to the independent hospital joining Loyola, which is owned by not-for-profit behemoth Trinity Health.
The non-binding letter of intent to explore merging Palos with Loyola follows their 2015 academic affiliation that allowed Palos to expand clinical services.
Palos Health operates Palos Hospital in the south suburb of Palos Heights and includes a medical group, the Sigma Patient Safety Organization, a physician network, a south campus in Orland Park that was expanded last year and is serviced by Loyola physicians, and other facilities. Palos and Loyola jointly own an outpatient surgery center and a radiation oncology center.
“We are operating in an incredibly dynamic healthcare landscape,” Palos Health’s chief executive officer, Terrence Moisan, said in a statement Monday. “By fully integrating with Loyola Medicine, we will enhance our clinical strength, increase our flexibility and provide our community with more comprehensive care across an expanded region.”
Loyola Medicine’s regional system includes Loyola University Medical Center located in the western suburb of Maywood, the west suburban hospitals Gottlieb Memorial Hospital and MacNeal Hospital, and a large ambulatory network offering primary and specialty care.
Michigan-based Trinity closed on the acquisition of MacNeal last year. It acquired the Loyola group in 2011.
The proposed transaction will “expand Loyola’s regional system to enhance access to care and services” and “retain and attract the best clinical staff and physicians,” the statement said.
The due diligence process is expected to take several months and the terms of the LOI were not disclosed. Regulatory approval will be needed if the systems decide to proceed.
Palos is an independent community hospital system while Loyola and Trinity are Roman Catholic. Some past unions of hospitals with divergent views encountered problems merging operations but Palos has been working with Loyola since 2015 so that could ease the transition.
Trinity has steadily expanded its footprint nationally over the years contributing to the ongoing elevated merger and acquisition activity the sector has seen due to operating pressures.
Independent hospitals are often viewed as the most at risk to fiscal strains over shifting payor pressures with more patients entering Medicare age and changing costs due to the Affordable Care Act and efforts to dismantle it, slowing revenue growth amid rising costs, and capital and technology needs.
“We believe management teams will seek to build greater strength in size and scale by merging or acquiring other hospitals and will also seek ways to innovate their delivery system models, which may require partnering with non-providers,” George Huang, senior analyst at Wells Fargo Securities’ municipal securities research, said in the firm’s recently published not-for-profit healthcare industry outlook.
The firm has a negative short-term outlook on the sector and expects issuance to remain fairly flat at 2018 levels of $26 billion with possible growth of up to 5%.
Palos brings with it a still sturdy balance sheet after adopting “significant management and governance changes” three to five years ago that followed operating challenges, Fitch Ratings said.
Fitch in March assigned the system its AA-minus issuer default rating and affirmed the hospital’s AA-minus rating on $139 million of 2010 debt. The outlook is stable. The system had a total of $362 million of as of last March sold through the Illinois Finance Authority. The system privately placed $100 million of floating rate debt and $129 million of fixed-rate debt in 2015.
The rating “reflects 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 EBITDA margins with manageable capital spending plans in the coming years,” Fitch wrote.
The system recorded $385 million in adjusted total operating revenues in fiscal 2017 and $859 million in unrestricted cash and investments that provide strong liquidity coverage.
Trinity operates more than 90 hospitals in 22 states.
“We consider the organization’s geographic and cash flow diversity to be key credit strengths, allowing the organization to leverage economies of scale for various common functions and absorb losses in underperforming ministries,” Moody’s Investors Service wrote in a December report ahead of Trinity’s last bond sale.
Trinity is rated in the double-A category by Fitch, Moody’s, and S&P Global Ratings. The system reported a 50% increase in operating income in fiscal 2018 with operating revenues growing to $18.3 billion from $17.6 billion.
