Going vertical

Dignity Health wants to make a bold move into the ambulatory-care world with the purchase of the occupational medicine and urgent-care centers of U.S. HealthWorks.

The announcement came three days after the U.S. Supreme Court upheld most of the Patient Protection and Affordable Care Act. Officials said the timing was mere coincidence. “We, in fact, signed it before that happened,” said Dignity Chief Financial Officer Michael Blaszyk. “I do think the court's actions were icing on the cake.”

Observers say the broad changes in healthcare delivery and payment encouraged by the law drove Dignity's desire to purchase the 172 medical centers of Valencia, Calif.-based U.S. HealthWorks.

The unusual deal, expected to close in August, comes amid several other odd pairings announced recently as players across healthcare sectors vie to keep ahead of the industry's charge toward integrated and coordinated care under emerging payment models in the reform law and with private payers.

Last month, for example, renal-care provider DaVita said it would pay $4.42 billion in cash and stock for HealthCare Partners, a privately held operator of medical groups and physician networks in Southern California, central Florida and Las Vegas. A division of UnitedHealth Group last year bought Monarch HealthCare, a large independent physician group based in Irvine, Calif., and Pennsylvania insurer Highmark has agreements to acquire Pittsburgh-based West Penn Allegheny Health System and an independent hospital south of Pittsburgh.

U.S. HealthWorks touts itself as the country's largest independent operator of occupational and urgent-care centers in the country, with about 2,700 employees across 15 states. Blaszyk said U.S. HealthWorks cleared $375 million to $400 million in organizational revenue last year.

The deal would give San Francisco-based Dignity a presence in 16 states, consistent with the organization's goals of becoming a national delivery network by 2020 and expanding toward the Atlantic. Dignity now has 37 hospitals in three states—last week, the system sold St. Mary's Regional Medical Center in Reno, Nev., to Prime Healthcare Services. Dignity has a pending agreement to buy Ashland (Ore.) Community Hospital, which the parties expect to close in August.

Blaszyk said negotiations with U.S. HealthWorks began in April, and Dignity fended off competition from a bevy of private-equity firms before reaching the agreement. Neither side disclosed financial details of the transaction.

“We were overwhelmed by interest; you should know that U.S. HealthWorks was hotly pursued,” said Daniel Crowley, the company's president and CEO.

Crowley said there were more than 20 parties interested in purchasing the company. Combining with Dignity gives U.S. HealthWorks a chance to grow its brand and expand to new regions, Crowley added. He will continue in his role as president and CEO with U.S. HealthWorks, which will function as a wholly-owned subsidiary of Dignity. Dignity says it also will offer employment to U.S. HealthWorks workers after the purchase becomes official.

The transaction serves as a unique opportunity for Dignity to expand, Blaszyk said. There's also little chance for this type of deal to be duplicated, as there aren't many national chains like U.S. HealthWorks, said Lou Ellen Horwitz, executive director for the Chicago-based Urgent Care Association of America. She was caught off-guard by the deal and said this was the first time a regional health system had purchased a national chain of urgent-care centers.

“Maybe Dignity was looking for a foot to expand and this was the only foot available,” Horwitz said. She also compared the deal to 2010 when insurer Humana spent $790 million to purchase Concentra and its 548 clinics in 42 states: “It's part of a larger strategic plan for the purchasing organization,” she said. “It's not necessarily because they want to grow the urgent-care business.”

Horwitz also said the addition of the U.S. HealthWorks facilities could serve Dignity well as the Affordable Care Act yields millions of newly insured patients with a shortage of primary-care providers in many communities. Those patients are going to need a place to find care, Horwitz said, and “the only logical places are going to be urgent-care centers.”

Lisa Goldstein, an associate managing director for health practices at Moody's Investors Service, equated the deal with the forming of an accountable care organization or nontraditional partnerships of payers and providers collaborating to reduce costs.

What's untraditional now, though, may become the new norm for the industry, Goldstein said. “We see it as indicative of the new type of partnerships that we are seeing now driven by the need to grow in scale and the need to expand outpatient or ambulatory care.”

Blaszyk echoed that assessment. “That's what this national health reform is about, that's what we're about and we think this moves us down the road to this journey,” he said.

Earlier this year, Dignity changed names from Catholic Healthcare West and severed formal ties from the Roman Catholic Church. The restructuring was intended to make the system more nimble, and it did, Blaszyk said.

The changes sped up the board approval process and allowed Dignity to compete with the other interested parties even though Dignity showed interest about a month after U.S. HealthWorks was on the market, Blaszyk said. “We rose to the task and were able to keep pace with the game.”