Seattle-based Providence Health System is considering a merger with Providence Services, Spokane, Wash., in a nonmonetary deal that would create the largest not-for-profit hospital system based in the Pacific Northwest and the sixth-largest Roman Catholic system nationwide.
The companies, both of which are sponsored by the order of the Sisters of Providence, have established joint planning teams to conduct due diligence and explore whether a merger would make sense. Their boards of directors plan to meet in December to review the findings and make a final decision.
The combined organization would have almost $6 billion in assets, 45,000 employees and 27 hospitals with a total of 5,171 acute-care beds in Alaska, California, Montana, Oregon and Washington. Among the nation's largest Catholic systems, it would rank sixth in terms of total number of beds and tie with Catholic Health East, Newtown Square, Pa., for fifth place based on total number of hospitals.
Ironically, the effort comes as one of Providence Services' main hospitals, 490-bed Benefis Healthcare in Great Falls, Mont., is working to sever ties with the system in a dispute about corporate control.
The systems hope to achieve greater efficiencies by integrating their disparate operations, said Cheryl Sjoblom, spokeswoman for Providence Health System. "Since we're already sister organizations, it makes good sense for us to pool our resources," she said. The proposed merger follows a trend among hospitals nationwide to team up to share costs and steel themselves against an array of market challenges. In 2004 alone, 170 hospitals were involved in 84 merger deals (Jan. 24, p. 20). "I think every hospital in the U.S. is looking at how to do more with fewer resources," said Sharon Fairchild, Providence Services' vice president of marketing and system development.
Providence Health System operates 18 hospitals in Alaska, California, Oregon and western Washington as well as long-term-care and assisted-living facilities and an 853,000-member health plan. Providence Services operates nine hospitals in Montana and eastern Washington, a regional laboratory and several clinics.
Both systems have held their own financially, with each being the dominant player in nearly all of their respective markets, according to Lisa Zuckerman, a director at ratings agency Standard & Poor's.
Providence Health System saw its operating income jump 47% last year to $185 million. Based on total revenue of $4.02 billion, that translates into an operating margin of 4.6%, well above the 2.47% median for not-for-profit systems nationally. Meanwhile, Providence Services posted 2004 operating income of $15 million on revenue of $1.07 billion, for an operating margin of 1.4%. That margin has climbed to around 3.5% this year.
Providence Health System is one of several not-for-profit hospital systems to be sued by Mississippi trial lawyer Richard Scruggs for allegedly overcharging uninsured patients (Aug. 22, p. 26). Providence spent $74.6 million on charity care last year.
Neither company has been immune to the rising cost of treating the poor and uninsured. Net income at Providence Health System's Providence Alaska Medical Center, Anchorage, fell to $13.4 million in 2003 from $35.2 million in 2000 as bad debt ballooned to $40.4 million from $14.3 million. After a variety of cost-cutting measures, the 364-bed hospital recovered somewhat last year, earning $27.5 million even as bad debt climbed to $46.7 million.
Providence Services' flagship Sacred Heart Medical Center in Spokane was also hit by a surge in bad debt after the state's elimination of a payment program for the medically indigent in 2003. Last year, the 623-bed hospital posted an operating loss of $3.9 million on $407.5 million in revenue, down from an operating profit of $9.1 million on revenue of $393 million in 2003.
Sacred Heart expects to end 2005 in the black, after laying off 350 employees, or 10% of its workforce, under the guidance of turnaround firm Navigant Consulting. Sacred Heart and Providence Services' three other Spokane-area hospitals also recently centralized their supply-management processes to reduce costs.
A merger with Providence Health System could further the streamlining. Providence Health System has been working to shave 2% to 5% off its annual infrastructure cost by centralizing its hospitals' billing systems and consolidating 11 data centers into two. "Both companies have a fair amount of overhead, so there's a certain amount of efficiency they could get by integrating operations," said Zuckerman of Standard & Poor's. "Obvious places where they might look to consolidate would be back-office functions, infrastructure and management."
But not everyone is keen on the notion of greater centralization. Benefis, Montana's largest hospital, is breaking away from Providence Services in order to maintain more local control. Tensions began to rise in 2003 when Providence asked Benefis to change its bylaws to give the system approval authority over the hospital's joint ventures. After Benefis declined, Providence last year stopped a bond issue that would have helped finance the hospital's new cancer center.
"We've definitely decided to end the affiliation," said Benefis President and Chief Executive Officer John Goodnow, adding that the decision had nothing to do with Providence Services' merger plans.
The separation won't happen overnight. But when it does, it could have a substantial impact on Providence Services' bottom line. According to Geraldine Poon, a credit analyst with Standard & Poor's, Benefis accounts for 16% of Providence Services' total assets, 17% of its operating revenue and 30% of its net operating income. While the company's balance sheet is expected to remain solid, "It will definitely affect their margins," she said.