Hoag, St. Joseph finalize deal to create new system

A Southern California health system and a nearby hospital have finalized a deal to create a new health system.

Executives with St. Joseph Health, Orange, Calif., and Hoag Memorial Hospital Presbyterian, in Newport Beach, Calif., said some details of the deal were not yet final, but the transaction would consolidate control over operations and strategy for five St. Joseph Hospitals and two Hoag hospitals under the new system, Covenant Health Network.

Deborah Proctor, president and CEO of St. Joseph Health, said other details, such as whether St. Joseph and Hoag would jointly borrow for capital projects, had yet to be finalized because executives delayed talks until California's attorney general approved the deal this month.

Dr. Richard Afable, president and CEO of Hoag Memorial, will step down to become chief executive of Covenant and executive vice president of St. Joseph Health's four Southern California hospitals.

Hoag Memorial's COO, Robert Braithwaite, was named Hoag's president and CEO.

Meanwhile, St. Joseph Health, which owns 14 acute-care hospitals in California and Texas, will control Covenant's governing board, the partners told their bondholders (PDF).

St. Joseph Health hospitals included in the deal are the two-campus Mission Hospital, St. Jude Medical Center, St. Mary Medical Center and St. Joseph Hospital of Orange.

The deal, though uncommon, is one of the latest transactions—some outright mergers and acquisitions, as well as other looser agreements—by hospitals and health systems motivated, executives say, by demand for better quality and lower-cost healthcare.

Afable said communities served by Hoag and St. Joseph Health are not immune to the need evident across the U.S. for less-fragmented and better-coordinated healthcare. The partners also see a great local need to improve access for low-income patients, he said.

The deal, which was first announced last August, won't alter the partners' religious affiliations. St. Joseph Health System, a Catholic healthcare provider, will continue to follow the Catholic ethical and religious directives for healthcare. Hoag Memorial will not adhere to the Catholic prescripts.

Plans for new system won approval from federal antitrust regulators last September.

Hoag Memorial's operating margin rebounded last year to 6% after the hospital lost money in 2011. Hoag Memorial reported income of $55.9 million on revenue of $931.9 million in 2012. The hospital's operating margin in 2011 was -0.6% after reporting losses of $5.8 million on revenue of $889.1 million.

“Hoag experienced similar economic trends as the rest of the country in 2011,” Jennifer Mitzner, chief financial officer of Hoag Memorial, said in a written statement. “Results from ongoing operational efficiency efforts combined with solid investment performance resulted in marked improvement in our overall financial results in 2012.”

Hoag Memorial reported positive operating margins of 5.1% in 2010 and 4.9% the year before that.

St. Joseph Health System saw its operating margin erode slightly in 2012 to 3.3% from 4.5% the prior year. The system reported operating income of $142.3 million on revenue of $4.4 billion last year compared with $191.5 million on revenue of $4.2 billion.