MERCY, HOLY CROSS FORM LATEST CATHOLIC UNION
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July 05, 1999 01:00 AM

MERCY, HOLY CROSS FORM LATEST CATHOLIC UNION

Deanna Bellandi
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    The joining last week of 39-hospital Mercy Health Services, Farmington Hills, Mich., and 13-hospital Holy Cross Health System Corp., South Bend, Ind., was the latest example of the rapid consolidation in Catholic healthcare.

    Combined, the two will operate in nine states, have revenues of $4 billion and employ more than 50,000 people. It will be the third-largest Catholic system based on revenues.

    The form the consolidation will take hasn't been decided, officials said. "It could be a merger; it could be an acquisition," said Judith Pelham, Mercy's president and chief executive officer. The deal is expected to be completed next year.

    The deal joins two other pending, high-profile Catholic marriages:

    * St. Louis-based Daughters of Charity National Health System and Ann Arbor, Mich.-based Sisters of St. Joseph Health System are set to form one system Oct. 1. It will own or be affiliated with 66 hospitals, spanning 15 states and the District of Columbia (June 21, p. 78).

    * Marriottsville, Md.-based Bon Secours Health System and Albany, N.Y.-based Franciscan Health Partnership are in talks. Seventeen-hospital Bon Secours seeks to acquire eight Franciscan hospitals in Kentucky, New Jersey, New York and South Carolina. The proposed deal no longer includes Franciscan's 357-bed Franciscan Medical Center in Dayton, Ohio. No closing date for the deal has been set.

    Deals between Catholic systems are driven by more than business interests.

    "I think the systems are coming together for the same reason they have come together in the past: an effort to continue the Catholic mission of providing healthcare," said Kay Sifferman, vice president and senior credit officer at Moody's Investors Service in New York. "They want to be able to sustain themselves as long-term organizations."

    The only two Catholic systems that would be larger than the combination of Holy Cross and Mercy are the new Daughters-Sisters system, which is expected to have annual revenues of $5.6 billion, and Denver-based Catholic Health Initiatives with annual revenues of $5 billion.

    "Strength begets strength, and that's the logic we are trying to pursue," said Sister Patricia Vandenberg, Holy Cross' president and CEO.

    What's also unclear is who will run the new, as-yet-unnamed system and where its corporate headquarters will be.

    One goal of the consolidation is to create a system that other Catholic healthcare systems can join.

    Mercy, which operates three times as many hospitals as Holy Cross, is the larger player in this deal.

    Mercy posted net income of $147.8 million on total net revenues of $2.5 billion for the fiscal year ended June 30, 1998. That's a 10% jump from the previous fiscal year when it posted net income of almost $134 million on total revenues of almost $2.4 billion, said spokesman Stephen Shivinsky.

    Holy Cross posted net income of $74 million on total revenues of $1.5 billion for the fiscal year ended May 31, 1998. During the preceding fiscal year, the system posted net income of $98 million on total revenues of $1.4 billion, said Deborah Hileman, Holy Cross spokeswoman.

    Holy Cross managed to hang onto its tax-exempt status last year after a physician recruitment company it owned pleaded guilty in federal court to paying illegal kickbacks to two physicians for patient referrals (May 4, 1998, p. 2).

    Vandenberg said that case had no bearing on the pending deal.

    Mercy and Holy Cross have no overlapping markets, and that diversity should mean greater stability for the new system, Pelham said.

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