Ex­it­ing two states ...

... Catholic Health Part­ners sheds hos­pi­tals, debt

Modern Healthcare - - The Week In Healthcare - Me­lanie Evans

Catholic Health Part­ners closed one deal and en­tered an­other last week to sell al­most a third of its hos­pi­tals to for-profit op­er­a­tors. The Cincin­nati-based sys­tem fi­nal­ized a deal last week to sell three Penn­syl­va­nia hos­pi­tals and con­firmed ex­clu­sive talks to sell an­other seven hos­pi­tals in Ten­nessee. In a letter to physi­cians and em­ploy­ees, Jef­frey Ashin, pres­i­dent and CEO of the Catholic Health Part­ners’ Ten­nessee re­gional sys­tem up for sale, said ex­ec­u­tives hoped to fi­nal­ize an ac­qui­si­tion by Health Man­age­ment As­so­ciates by the fall.

Catholic Health Part­ners also ex­its two states with the deals.

By di­vest­ing the Penn­syl­va­nia hos­pi­tals, the sys­tem ex­ited what of­fi­cials said was an over­crowded mar­ket. By sell­ing its Ten­nessee hos­pi­tals, Catholic Health Part­ners would shed the debt bur­den that came with the sys­tem’s 2008 ac­qui­si­tion of Bap­tist Health Sys­tem of East Ten­nessee, said ex­ec­u­tives with the sys­tem and its Knoxville, Tenn.-based sys­tem Mercy Health Part­ners.

The deals also, how­ever, will leave Catholic Health Part­ners with­out the size and geo­graphic di­ver­sity cited as a strength by credit an­a­lysts. Mercy Health Part­ners in Ten­nessee ac­counts for roughly 9% of the sys­tem’s $5.6 bil­lion in as­sets and the Penn­syl­va­nia op­er­a­tions made up an­other 2%.

The sys­tem’s op­er­a­tions, al­ready con­cen­trated heav­ily in Ohio, would be even more so af­ter the deals. Nonethe­less, an­a­lysts with Moody’s In­vestors Ser­vice and Fitch Rat­ings also de­scribed the strug­gling Ten­nessee op­er­a­tions as the sys­tem’s “great­est strate­gic and op­er­a­tional chal­lenge” and a risk to its credit sta­bil­ity, re­spec­tively.

Mercy Health Part­ners’ weak fi­nan­cial per­for­mance af­ter the merger com­pounded stress from the debt, said John Starcher, CEO of the sys­tem’s re­gional divi­sion and a se­nior vice pres­i­dent.

Ex­ec­u­tives opted to exit Ten­nessee rather than re­quire hos­pi­tals in Ohio and Ken­tucky to help pay down Mercy Health Part­ners’ debt. Each re­gional sys­tem “has to be able to stand on its own two feet,” Starcher said.

Mercy Health Part­ners lost $14 mil­lion on its op­er­a­tions in 2010 with rev­enue of $616.3 mil­lion, its fi­nan­cial records show. The Ten­nessee hos­pi­tals lost $17.8 mil­lion on op­er­a­tions the prior year and fin­ished 2008 with an op­er­at­ing loss of $35.5 mil­lion.

Starcher said re­duced Medi­care re­im­burse­ment and the re­ces­sion had strained Mercy Health Part­ners’ fi­nances. Both de­vel­op­ments were un­ex­pected prior to the de­ci­sion to ac­quire Bap­tist Health in early 2008.

“We do not re­gret the ac­qui­si­tion,” he said. “It was the right de­ci­sion at the right place and time and right for the com­mu­nity.”

For Health Man­age­ment As­so­ciates, the prospec­tive buyer in Ten­nessee, the deal would be the com­pany’s largest ac­qui­si­tion and would give the pub­licly traded com­pany an­other ma­jor mar­ket, said Kemp Dol­liver, a man­ag­ing di­rec­tor with Avon­dale Part­ners, an in­vest­ment bank and pri­vate equity ad­viser. Any deal reached must win reg­u­la­tory and canon­i­cal clear­ance.

Ex­ec­u­tives dis­cussed the sale of the Ten­nessee hos­pi­tals with other Catholic health sys­tems but re­ceived no of­fers from po­ten­tial Catholic buy­ers, Starcher said. Only for-profit, sec­u­lar hos­pi­tal op­er­a­tors bid on the hos­pi­tals.

Jerry Askew, se­nior vice pres­i­dent for ex­ter­nal re­la­tions at Mercy Health Part­ners in Knoxville, said the sys­tem sought a part­ner with sim­i­lar val­ues and re­sources to make needed cap­i­tal in­vest­ments.

Michael Con­nelly, pres­i­dent and CEO of Catholic Health Part­ners told Mod­ern Health­care in a re­cent in­ter­view that the sale of Catholic hos­pi­tal to sec­u­lar buy­ers is un­for­tu­nate but not with­out some po­ten­tial ben­e­fits.

“I would say that it is driven by some re­al­i­ties in the mar­ket­place,” Con­nelly said. “Clearly, cap­i­tal for­ma­tion in the for-profit sec­tor is very dif­fer­ent. Their abil­ity to ac­cess cap­i­tal and not meet bond re­quire­ments al­lows them to take a higher level of risk than come of the Catholic sys­tems.”

Con­nelly added that for-profit buy­ers in some cases have had a pos­i­tive ef­fect on the hos­pi­tals they buy. “I am fa­mil­iar with some mar­kets where it caused some changes that no­body else could cause,” he said, “which is what the com­mu­nity needed.”

The sys­tem’s $ 150 mil­lion deal with Com­mu­nity Health Sys­tems, fi­nal­ized last week, in­cluded 224-bed Mercy Hos­pi­tal, Scran­ton; 58-bed Mercy Tyler Hos­pi­tal in Tunkhan­nock and the 68-bed long-term acute-care hos­pi­tal Mercy Spe­cial Care Hos­pi­tal in Nan­ti­coke. The ad­di­tions bring Com­mu­nity’s count of acute-care hos­pi­tals in Penn­syl­va­nia to 13.

For Catholic Health Part­ners, the funds paid down $60 mil­lion in loans made to the Penn­syl­va­nia op­er­a­tions and erased an­other $8.9 mil­lion li­a­bil­ity.

The sys­tem do­nated $25 mil­lion to com­mu­nity health in Penn­syl­va­nia and in­vested nearly all the re­main­ing cash in for­mer em­ploy­ees’ pen­sion funds.

Catholic Health Part­ners may ex­pand again, Starcher said—the sys­tem has been ap­proached as a po­ten­tial buyer for other providers and will eval­u­ate them—but it will fo­cus on the sys­tem’s ex­ist­ing mar­kets.

Mercy Med­i­cal Cen­ter St. Mary’s is one of seven hos­pi­tals Catholic Health Part­ners hopes to sell to for-profit Health Man­age­ment As­so­ciates.

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