Steward Health Care plans to acquire Iasis Healthcare

Steward Health Care plans to acquire Iasis Healthcare to create a 36-hospital system with an estimated revenue of $8 billion, the organizations announced Friday.

Boston-based Steward currently operates 18 hospitals and directly employs more than 1,300 physicians across Massachusetts, Ohio, Florida and Pennsylvania. Franklin, Tenn.-based IASIS oversees 17 hospitals throughout Utah, Arizona, Colorado, Texas, Arkansas and Louisiana.

The deal, which is backed by real estate investment firm Medical Properties Trust and private-equity firm Cerberus Capital Management, is expected to close in the third quarter. Terms of the transaction were not disclosed.

Steward CEO Dr. Ralph de la Torre said in a statement that the acquisition will bolster its "physician-driven accountable care model" that propels a more "cost-effective, local, coordinated approach that puts patients first."

Health systems claim that they can drive cost savings and better quality outcomes by creating scale. Economists worry that fewer competitors will lead to a lopsided healthcare market with higher costs.

Driving efficiency can be a valid defense for potential acquisitions, but those efficiencies must be a direct result of the merger, said David Dranove, Northwestern University professor and co-director of Health Enterprise Management at the university's Kellogg School of Management. The efficiency argument does not work if systems can achieve those goals without merging, he said.

"The problem with many mergers is the case for efficiencies is made after an agreement is reached by the parties," Dranove said Thursday at Northwestern University's Kellogg School of Management's Annual MacEachern Symposium for Healthcare.

Without effective competition, hospitals can secure higher price concessions in their negotiations with insurers, the Center for Health Policy at the Brookings Institution and Carnegie Mellon University's Heinz College said in a recent paper. Hospitals with fewer than four local competitors are estimated to have prices nearly 16% higher on average—a difference of nearly $2,000 per admission, researchers found.

Prices across the U.S. healthcare industry are high and vary in seemingly incoherent ways, yet quality of care is uneven while the industry lacks the innovation seen in other sectors of the economy, researchers said.

"The evidence is that market power drives much of this variation in prices. Hospitals that face little in the way of effective competition are able to extract higher price concessions in their negotiations with insurers, and do," the paper reads.

As part of the Steward deal, Medical Properties Trust said it would pay $1.4 billion for the real estate for 10 Iasis hospitals and one behavioral-health facility when the transaction is completed.

In another recent deal, Steward agreed to buy eight hospitals from the struggling Community Health Systems to subsidiaries of Steward in February, marking the single biggest CHS divestiture to date.

Steward's expansion was foreshadowed by a $1.25 billion deal with Medical Properties Trust reached in September. Medical Properties bought nine Steward Hospitals, invested an additional $50 million for a 5% equity stake and pledged to finance additional hospital acquisitions made by Steward for up to $1 billion.

As for Iasis, the company reported a $117 million operating loss in 2016, but saw much of the company's managed-care business grow. Its Medicaid and other managed-care membership increased 69% on the year to nearly 680,000.

"Steward's innovative approach to reducing health care cost and improving quality of service will further (Iasis') mission," Iasis President and CEO W. Carl Whitmer said in a statement.

There have been a flurry of merger deals since the start of 2017, including the Hackensack Meridian Health and JFK Health deal, the Baptist Memorial Health Care and Mississippi Baptist Health Systems merger, the Beth Israel Deaconess and Lahey Health transaction, and the Fairview Health and HealthEast merger proposal.

The combined Steward and Iasis entity would have nearly 7,500 patient beds across 10 states with approximately 38,000 employees including more than 1,800 directly employed physicians.

"I expect that (consolidation) trend to continue," said Bob Joyce, who heads the healthcare group at U.S. Bank Wholesale. "When you are facing an uncertain environment as far as what reimbursement may look like, the only way to get economies of scale and efficiency is to become much larger."