Health systems are increasingly turning to looser joint operating structures as they search for new merger partners, with Virginia Mason and CHI Franciscan being the latest example.
Creating joint operating companies like the $4.5 billion system Virginia Mason and CHI Franciscan plan to form in the Seattle-Tacoma area allows providers to capture the benefits of a merger while avoiding the pitfalls. In this particular case, using the joint structure might be an effort to keep separate the assets of a Catholic and a secular organization. Or the systems might view it as their best chance of dodging an antitrust challenge.
"I would doubt that any one factor was determinative here," said Rick Zall, a partner at Proskauer and chair of its healthcare industry practice.
In a joint operating company, parties typically don't combine assets and instead create a new corporation that sits on top. The structure allows both sides to reap the benefits of a merger—namely, scale and efficiencies—while avoiding the complexity and finality of combining assets. It would allow a reputable institution like Seattle-based Virginia Mason to retain more independence than a full-on acquisition by the Washington division of CommonSpirit Health, a massive, 137-hospital system with $21 billion in revenue.
"Sometimes that is the fastest way to truly integrate and create a single enterprise," Zall said.
Healthcare is still a local business, and the joint operating company structure capitalizes on that by giving the parties an equal number of board seats. They also don't necessitate disrupting financing and bond agreements the way an acquisition would. Plus they're easier to unwind if they don't work out.
Catholic Health Initiatives has a long history of joint partnerships, including several active joint operating agreements. It has agreements with several systems to form Premier Health in Dayton, Ohio. TriHealth in Cincinnati, Ohio is a joint operating agreement between CHI and Bethesda, Inc. Cincinnati. Centura Health in Centennial, Colo. is a joint operating agreement between CHI and AdventHealth.
It's possible the Catholic affiliation also plays a role. The Catholic church may want to avoid an affiliated organization combining with a secular one, even though Virginia Mason has agreed to stop performing some reproductive healthcare and physician aid-in-dying services, said Dan Howell, director of healthcare and life sciences for West Monroe Partners in Seattle.
Several reproductive health, LBGTQ+ and end-of-life care advocates in Washington issued a joint statement this week that said they are "deeply concerned" that the deal could result in Virginia Mason denying patients access to certain reproductive and end-of-life care options. CHI Franciscan operates under a set of Catholic healthcare rules that preclude it from providing services like abortion, contraception, vasectomies, tubal ligations, hormone treatments and physician aid-in-dying.
Given Tacoma, Wash.-based CHI Franciscan's patchy antitrust history in Washington, the state's attorney general is likely to subject the deal to considerable scrutiny. Attorney General Bob Ferguson sued the health system in 2017 after it acquired two doctor groups, accusing CHI Franciscan of reducing competition. Following those deals, Ferguson said patients in the area faced higher prices, fewer choices, longer waits and difficulty scheduling. The lawsuit uncovered damaging statements in emails between CHI officials, including one written by CHI Franciscan's Chief Financial Officer, Mike Fitzgerald, in which he wrote of the acquisitions, "It would be great to drop a couple million more to our bottom line, if we think we can do it."
CHI Franciscan paid more than $2.5 million last year to settle that case. As part of the settlement, CHI Franciscan has to notify Ferguson's office about future deals that could decrease competition. Washington state lawmakers approved a law the same year requiring healthcare providers to notify the attorney general's office 60 days in advance of any mergers, acquisitions or affiliations.
Ferguson's office plans to review any transaction between Virginia Mason and CHI Franciscan if the parties reach an agreement to ensure it "does not substantially lessen competition and harm Washingtonians in violation of antitrust laws," spokeswoman Brionna Aho wrote in an email.
Choosing the joint operating company probably won't offer any more antitrust protection than an acquisition or other structure would, said Eb LeMaster, managing director with Ponder & Co.
"That's not going to get you free and clear of that issue," he said. "I don't think that would be the driver for picking this structure."
Even though the parties keep their assets separate, regulators would likely still view Virginia Mason and CHI Franciscan as a single actor, assuming the joint operating company is truly a decision-making body, Zall said.
"I don't think that insulates them from the potential issues," he said.
In a joint statement, Virginia Mason and CHI Franciscan said the structure is intended to be a projection of their collaboration to advance healthcare "through a combination of our vast and complementary strengths, therefore a JOC model seems to make the most sense."
One thing is for sure: the Seattle area has a fragmented healthcare market that's still competitive despite the high degree of collaboration that happens between providers, Howell said. Virginia Mason and CHI Franciscan would have 10 acute-care hospitals and $4.5 billion in revenue, putting it just above the area's biggest competitor: Renton, Wash.-based Providence, which has eight hospitals in the area, including five it picked up in 2012 when it acquired Swedish Health Services.
The way Howell sees it, Virginia Mason, which has been losing money in recent years, is looking to gain the scale that CHI Franciscan would offer. Without the volume that's needed to drive value-based contracts with insurers, it has become increasingly difficult to operate in the region, especially with all the consolidation that's happened in the past decade, he said.
"It's just really hard to compete long-term with those bigger players," Howell said, "and over time it's just continuing to get worse and worse."
