Providence and Hoag will break up their merger this month, the not-for-profit healthcare organizations announced late Monday.
Hoag, a small Southern California-based health system, sued Providence in 2020, claiming that the 52-hospital Catholic system didn't hold up its end of their population health initiative. Hoag will separate from Renton, Washington-based Providence on Jan. 31, about nine years after they combined.
"Although we are formally parting ways, we will have other opportunities to work together on behalf of the community. We look forward to future collaborations with our colleagues at Hoag, whom we continue to hold in high regard," Erik Wexler, president of operations at Providence, said in a news release.
The separation opens new avenues of collaboration, Hoag Memorial Hospital Presbyterian CEO Robert Braithwaite said in the news release.
The organizations reached a settlement agreement but declined to elaborate.
Providence's centralized governance model allegedly stripped Hoag of local decisionmaking authority, Hoag claimed in the lawsuit. There had been a series of cultural, financial and operational clashes, Hoag executives told Modern Healthcare last year, many of which Providence denied. Providence improved Hoag's medical group, diagnostics, ambulatory surgery centers, orthopedic services and mental health offerings, Providence executives countered.
Most hospitals that joined a larger system—including Hoag Memorial Hospital Presbyterian and Providence—generated more revenue but didn't become more efficient, Modern Healthcare's analysis of Medicare cost reports from 2013 to 2019 shows.
Still, Hoag's operating margin exceeded 5% from 2015 to 2019, according to the Office of Statewide Health Planning and Development data. Providence reported a 1.4% operating margin in 2015, a negative 1.2% margin in 2016 and a sub-1% margin through 2020.
Hoag, which has two hospitals in Newport Beach and Irvine as well as an orthopedic institute, accounted for around 6% of Providence's operating revenue and 17% of Providence's unrestricted cash and investments, Providence said in its 2021 third quarter earnings report. Southern California accounted for nearly a third of Providence's operating revenue as of Sept. 30, according to financial filings.
Annual hospital merger transactions sunk to 71 in 2021, the lowest mark since 2009 and the fourth consecutive annual decline, according to the healthcare advisory firm Ponder & Co. While it's still relatively rare compared to completed transactions, about a dozen not-for-profit health systems dissolved their mergers or walked away from merger proposals over the last three years.