Steward closes $2B acquisition of Iasis' 18 hospitals

Steward Health Care completed its acquisition of 18 Iasis Healthcare hospitals in a $2 billion deal that expands the Boston-based provider's footprint to 36 hospitals across 10 states with an estimated revenue of nearly $8 billion.

Steward is now the largest private hospital operator in the country after acquiring Franklin, Tenn.-based Iasis' hospitals in Arizona, Arkansas, Colorado, Louisiana, Texas and Utah. Steward now has 37,000 employees, 1,400 employed physicians and 4,700 integrated network physicians under its umbrella, the organization said.

Steward CEO Dr. Ralph de la Torre said in a statement that the acquisition, announced in May, will bolster its "physician-driven integrated care model" as the system continues to snap up struggling hospitals.

The deal, which is backed by private equity firm Cerberus Capital Management and real estate investment firm Medical Properties Trust, also expands its managed-care and health insurance arm to cover more than 680,000 patients.

The acquisition will give Steward leverage with its suppliers to reduce spending on information technology, capital expenditures and medical supplies, said Steven Wybo, senior managing director of advisory firm Conway MacKenzie.

"Large funds, like Cerberus, believe that there is plenty of opportunity for value creation within the healthcare sector by running the hospitals more like a for-profit business by focusing on streamlining operations, eliminating duplication and managing costs while improving revenue and ultimately profit margins," he said.

Steward's expansion was foreshadowed by a $1.3 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.

"Steward's innovative approach to reducing healthcare cost and improving quality of service will further (Iasis') mission," said former Iasis CEO W. Carl Whitmer, who announced he was resigning Friday after the deal was completed.

Steward also agreed to buy eight hospitals from the struggling Community Health Systems in February.

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 enrollment increased 69% for the year and contributed $1.29 billion to the company's $3.25 billion in total revenue.

Particularly with physician-led models, integration is key on both the clinical and operational sides, said Kenya Woodruff, chair of the healthcare practice group at the law firm Haynes and Boone.

"There is always risk with merging entities of this size," she said. "As we see in many industries, culture is so important post-merger."

Communication between the compliance and legal officers of both organizations is also vital to best understand the strength and weaknesses of each company, Woodruff added.

Healthcare mergers, particularly among larger providers, have been steadily increasing over the past year. Health systems are looking to insulate themselves from ever-changing healthcare policy and spread the cost of adapting to new payment models, said Thad Kresho, U.S. health services deals leader for PricewaterhouseCoopers.

"Providers have continued to align operations with new reimbursement models and have sought ways to be more efficient operators, with a focus on increased quality of care," Kresho told Modern Healthcare in July. "The drivers of consolidation vary slightly by sector but all are seeking the strength of scale."

Hospitals may be looking to realize cost synergies, relieve margin pressure and exercise greater leverage in their payer negotiations, he added.

Stand-alone hospitals that operate in one of the 10 states of the combined Steward and Iasis organization have now become sellers or buyers, Wybo said. "Having an extremely large, for-profit competitor in your own backyard will cause you to rethink your stand-alone strategy," he said.