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.