Ascension Health, the nation's largest Catholic health system, and Daughters of Charity, which owns six hospitals, entered into an affiliation agreement in December 2012 that the Daughters of Charity described to lenders last March as “a platform to continue merger activities.”
Ascension Health did not find other deals in California that would have created desired market leverage when combined with Daughters of Charity's operations, said Robert Issai, president and CEO of Daughters of Charity. With two hospitals in southern California and four in two markets in the state's northern half, the system's operations were too scattered to give Daughters of Charity the scale and market clout that its officials believe is needed, he said. “It's tremendously difficult to be a small system across three markets,” he said.
Health systems with stronger networks and greater market presence are better-positioned to meet economic and regulatory challenges that now confront hospitals, such as a decline in hospital use and a shift to population health management, said Robert Henkel, president and CEO of Ascension Health. Talks between Ascension and Daughters of Charity lasted 22 months and “couldn’t find a pathway that assured long-term viability” for the California system, he said.
St. Vincent Medical Center in Los Angeles and St. Francis Medical Center in Lynwood, Calif., are already on the market. The decision to sell quickly was made to avoid the possibility that a future sale would be more difficult, Issai said. “You don't want to wait and see what happens,” he said. “I am paid to see the writing on the wall and what the future holds.”
Deep operating losses in recent years have weakened the Daughters of Charity's already strained finances. The health system's operating margin worsened to -6.8% its last fiscal year, which ended June 30, compared with -4.8% the prior year, unaudited financial statements show.
The system admitted fewer hospital patients and performed fewer outpatient surgeries last year; operating losses mounted to a total $90.8 million, eroding the Daughters of Charity's already thin cash cushion to an amount equal to 50 days of operating expenses.
Officials will seek buyers that can improve market position and access to capital for individual hospitals or the entire system, Issai said. For-profit, not-for-profit, Catholic and non-Catholic buyers will be considered. “We're not going to put any limits on it.”
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