For the second time in less than a year, Samaritan Health System in Phoenix has failed to complete a merger with another regional system, leaving open questions about its future direction.
Last week, Samaritan's planned merger with Mercy Healthcare Arizona fell through because of what the parties called "business differences."
In addition, a prominent Phoenix healthcare executive believes cultural differences between the two organizations also may have played a role in the merger's demise.
According to Mercy and Samaritan, the one difference that could not be resolved was this critical issue: The degree of control Mercy's corporate parent, San Francisco-based Catholic Healthcare West, would be able to exert over the consolidated operations of Samaritan and Mercy.
The combined systems would have controlled six acute-care hospitals in Arizona with annual revenues topping $1.5 billion.
Samaritan and Mercy announced their plans for a merger last fall, shortly after the downfall of merger discussions between Samaritan and HealthPartners of Southern Arizona. Last month, Samaritan and Mercy got as far as picking a name for themselves-Samaritan-CHW Health System (June 16, p. 22).
Talks were halted last week. "The core issue centered around local control as it related to CHW's financing requirements," said Jane Wilson, a Mercy spokeswoman.
Wilson was referring to provisions of the merger that had CHW picking up Samaritan's approximately $410 million in long-term debt and refinancing it at more favorable terms.
In return for assuming the debt, CHW wanted to establish specific financial targets for Samaritan-CHW Health System, said Michael Gallagher, CHW senior vice president of policy. Gallagher said Samaritan initially agreed to the terms when the merger was announced but the terms "became an issue with Samaritan after initial due diligence."
CHW, a Roman Catholic not-for-profit system, wanted Samaritan-CHW to meet specific profitability targets. It also wanted the authority to remove the system's chief executive officer and appoint the CEO's replacement if targets weren't met.
The parties had not yet named a CEO to head the new system.
What's more, CHW wanted the power to replace the system's 14-member board if the system wasn't contributing its share toward supporting CHW's companywide debt.
Gallagher said the terms are imposed on all CHW's hospitals in order to leverage the system's investments and preserve its credit ratings.
"It's just good business principles," he said, adding that none of its hospitals ever has had a CEO or board replaced by the parent system.
But Samaritan, which owns five of the six hospitals that would be in the new system, apparently could not live with that threat.
"Because that debt would be consolidated there was a measure of control needed (by CHW)," said Dan Green, Samaritan's vice president of system development. "We understood that, but we were not prepared to relinquish control to the degree necessary. It was a barrier we could not overcome."
Green would not comment specifically on the proposed terms.
Although the merger appeared to move along smoothly for nearly eight months and was slated for completion by year-end, other healthcare operators in Phoenix were apprehensive about it being finished, said Reginald M. Ballantyne III, chief executive of PMH Health Resources in Phoenix and chairman of the American Hospital Association board.
"There had not been any truly aggressive realignment (in the Phoenix healthcare community) because people thought the cultures (at Samaritan and Mercy) were so very different that the deal may not (be) completed," Ballantyne said.
With five hospitals, Samaritan was used to working as a system, he said. Mercy, on the other hand, operates one hospital and is used to going it alone, he said.
For the near future, Samaritan has no plans to pursue further deals.
"We're going to take a time-out to assess where we stand financially and revisit our capital requirements," Green said. "Debt service is an issue."
Samaritan posted a $79 million loss last year, much of it linked to a $90.7 million write-off it took to prepare for a merger with HealthPartners.