The St. Louis hospital market, for the past several years a stable triangle, is about to get a new corner. But it's hard to know whether the market will turn into an equally stable square or evolve into a more dynamic and interesting shape.
The new force is Tenet Healthcare Corp., which announced Jan. 10 it is negotiating to purchase Deaconess Incarnate Word Health System. That system, formed in 1995, operates three hospitals: Deaconess Medical Center and Incarnate Word Hospital, both in St. Louis, and Deaconess Medical Center West in St. Louis County. Together, they have 1,030 beds and $273 million in annual revenues.
But Deaconess Incarnate Word is a market also-ran. St. Louis has been dominated by three systems: BJC Health System, Unity Health System and St. Louis Health Care Network. All are not-for-profit.
Enter Tenet, which for years has operated the only for-profit hospital in the area, Lutheran Medical Center. Tenet will have four hospitals in town plus three in outlying Missouri if agreement on terms is reached, as expected, in three to four months.
A tentative purchase price has yet to be disclosed.
Local businesses, at least, see hopeful signs in the new developments.
"This establishes a legitimate fourth player. That's good for balance and choice," said James Stutz, executive director of the St. Louis Area Business Health Coalition.
Stutz, whose group has 41 members representing 400,000 people, sees three potential benefits of the sale: A more competitive market for purchasers; the endorsement of the tight relationship between a major physician group and Deaconess; and creation of a new foundation with assets from Deaconess' conversion.
The business coalition also welcomes "another management style, a for-profit management style. It can't help but be healthy," Stutz added.
From Tenet's point of view, it's a great match. The company's philosophy is to build on existing assets, and the opportunity to add three hospitals in a market where it already owned one proved irresistible, said Bill Bradley, senior vice president for Tenet's central states region.
Tenet has pledged to sustain the hospitals' religious identity to the extent their sponsors wished, and not to reduce their level of charity care. Deaconess is affiliated with the United Church of Christ, and Incarnate Word is sponsored by the Sisters of the Incarnate Word, a Catholic order based in San Antonio.
Deaconess had been evaluating its future for several years, said board Chairman H.C. Milford.
The hospitals had been left out of the merger sweepstakes and although not losing money, "we have not been as successful as other groups in the market," he said. "We thought we could stand alone for a while, but we did not have the resources to stand alone into the future."
Two organizations responded to Deaconess' request for proposals: Tenet and Unity.
Ron Ashworth, Unity's chief executive officer, said the two groups had been in discussion for some time, first about a merger, then about a purchase. By December they had resolved every issue except one: Deaconess' contract with the St. Louis Medical Group. With 125 physicians, mostly primary-care practitioners, it's one of the largest physician groups in a city that lacks huge agglomerations of doctors. Without the physician group, the three hospitals would be worth much less.
Unity already had a tight relationship with its own medical group, including a standard contract. The Deaconess physician contract was very different and lacked a noncompete clause.
"Consistency is very important," Ashworth said. Without it, physician relations within Unity would fracture. The Deaconess physician group declined to accept Unity's terms, so Unity withdrew.
Tenet, on the other hand, saw Deaconess' close ties to its medical group as an asset. Tenet hasn't formulated its managed-care strategy yet, Bradley said. But the Deaconess primary-care component has gained it access to most of the major managed-care contracts in the area. "We're going to build on that, and hopefully expand the geographical reach," he said.
Another advantage of selling to Tenet was the opportunity to use proceeds from the sale for community healthcare needs, Milford said. A merger with Unity would not have produced such a windfall.
The portion of assets belonging to the Deaconess Foundation will remain in St. Louis and be used for community healthcare. The other portion will be at the disposal of Sisters of the Incarnate Word.
Tenet doesn't necessarily expect to pursue a more aggressive pricing strategy to gain market share. "That's not a specific strategy we have," Bradley said.
Milford, too, doubted Tenet could cut prices. "That would be sort of like the tail wagging the dog. BJC and Unity, they probably have a little more ability as to the numbers."
But one observer was skeptical that Tenet's expansion would make much difference. "Even with this acquisition, they're not going to have a very large market presence," said the analyst, who didn't want to be identified.
The four Tenet hospitals will have only 8.4% of the market, measured by patient days.