"Because each organization had different strengths, we thought the shared governance model would work really well," Garrett said in a Q&A with the Advisory Board Co.
Typically the dyad model only works well in the short term, said Tom Giella, chairman of healthcare services for Korn Ferry.
"It is a good short-term solution while they figure out integration and people and cultures, but ultimately you have to pick your leader. I think that will come in two years-plus," Giella said, adding that otherwise, culture and egos can clash.
Asked by an investor whether the co-CEO role is temporary, a CHI executive said during the earnings call that it's too early to say how long the structure will stay in place.
"Both boards felt that retaining the two of us would help accelerate the integration," Lofton said in an interview with Modern Healthcare.
As for the financial picture, officials from both companies said that they have a goal of combining their credit groups in three years. For their part, Dignity officials didn't shy from admitting it will be a challenge, and Chief Financial Officer Daniel Morissette emphasized the system will be monitoring the effects to its organization.
"Obviously our focus is on protecting our own creditors and CHI's focus is on that as well," he said.
Ultimately, Morissette said the system will be well-served by having combined credit, but a number of steps must be taken before that can happen. That includes reconciling the organizations' debt portfolios, with a combined $9.6 billion in long-term debt.
The deal could allow CHI to refinance its debt based on the higher credit rating of Dignity, which would also have more negotiating leverage with payers, said Harry Bramson, a senior associate at consulting firm Conway MacKenzie.
Asked to address how the merger could affect Dignity's credit rating, Lisa Zuckerman, senior vice president of treasury and strategic investing for the system, didn't offer much in the way of specifics. "We would anticipate that upon closing and becoming one company, that our rating would be re-evaluated," she said on the earnings call. "It's hard to say right now."
Both Fitch Ratings and S&P Global Ratings said the move could ultimately result in a credit downgrade for Dignity.
The new system will likely experience tight margins during its initial consolidation period, Fitch wrote in a report issued Friday. That's due in part to significant consulting and legal expenses preceding the transition, and also to weak cash positions with respect to debt and cash flow for both Dignity and CHI.
S&P's rating outlook on CHI remains stable as the merger would be beneficial to its financial metrics and could facilitate financial synergies.
"I think the combined organization would presumably be somewhat stronger than what CHI is today," said Martin Arrick, a managing director in S&P's not-for-profit healthcare group. "As for Dignity, it gets a much bigger platform and it helps them diversify what are difficult markets in California, Arizona and Nevada. CHI has a wide variety of markets across the country and they are just not doing as good of a job as they need to in terms of operations."
Dignity, which has 39 hospitals, saw its operating loss widen to $66.8 million in fiscal 2017, up from $63.4 million last year, due to a decline in payer mix as well as delays in California's provider-fee program payments, which subsidize hospitals that treat a large share of indigent patients.
Dignity reported a net surplus of $383.6 million for the year ended June 30, up from a net loss of $237.8 million, powered by investment income of $555.5 million after a loss of $124 million in fiscal 2016.
CHI, a 100-hospital system, saw its operating losses widen to $585.2 million in 2017 from $371.4 million last year.
Non-operating income, including investment income, increased to $713.6 million in 2017 compared with a loss of $204.2 million in 2016. That allowed CHI to post a net surplus of $128.4 million for the year compared with a net loss of $575.6 million last year.
CHI executives said that they found $500 million in redundancy and other potential savings between the two organizations.
"The challenge of a big national not-for-profit versus a more geographic one is that it is hard to get synergies outside of group purchasing when you are scattered throughout country," Giella said. "There may be an opportunity for them to come together and sell a few assets that don't fit and create more geographic hubs."
The merger would allow the expansion of outpatient and virtual care settings, broadening clinical programs, including ones that treat chronic illness, and advancing the use of digital technology like stroke robots and Google Glass, which will facilitate more personalized and efficient care, executives said.
"We are looking at using our combined scale to capture the best-in-class clinical service lines and retain and attract the best talent, and look at how can we standardize our operations to improve patient experience, improve quality, reduce cost of care and use our voice to impact the direction and capacity of healthcare in this country," Dean said.
The new health system will establish its corporate headquarters in Chicago and operate under a new name that will be chosen in the second half of 2018. Local facilities will continue operating under their current names.
Hospitals and health systems have been consolidating at a rapid clip in both horizontal and vertical mergers. While hospital executives claim that scale is needed to lower costs, researchers point to the contrary and say consolidation often produces higher prices and insurance premiums.
Dignity and Sutter Health were the focus of a 2016 study that revealed the dominant hospital chains drove up healthcare prices. Glenn Melnick, an economist at the University of Southern California's Schaeffer Center for Health Policy & Economics, and co-author Katya Fonkych found that Blue Shield of California's average payment per admission to Dignity and Sutter facilities increased 113% from 2004 to 2013—$9,183 to $19,606.
While the CHI-Dignity merger makes sense on paper, scale doesn't guarantee success, said Joseph Lupica, chairman of Newpoint Healthcare Advisors. "I don't buy into the 'consolidation for efficiency' mantra as a panacea," he said.
