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August 12, 2020 08:01 AM

Sentara, Cone Health plan merger

Tara Bannow
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    Sentara CEO Howard Kern

    Two multi-billion-dollar health systems in Virginia and North Carolina—Sentara Healthcare and Cone Health—announced Wednesday they plan to merge to create a 17-hospital system.

    The CEOs of both not-for-profit health systems shot down the notion that the proposed deal is happening in response to pressures caused by the COVID-19 pandemic. Instead, they said they believe it will help patients by expanding access to care and adding new insurance options and caregivers by adding stability. Norfolk, Virginia-based Sentara and Greensboro, N.C.-based Cone have signed a letter of intent and hope to close the deal in early to mid-2021.

    "We've all had to deal with the impact of the pandemic, including financial and otherwise, but we're both very, very strong organizations and we're in the position to make this decision coming from strength and being proactive," said Cone Health CEO Terry Akin.

    The resulting system would have 17 hospitals—12 from Sentara plus Cone's five—and $11.5 billion in revenue. Sentara drew $6.8 billion in revenue in 2019, while Cone drew $2.2 billion. Sentara has a small presence North Carolina currently, with one small hospital in Elizabeth City. Cone's operations are entirely in North Carolina, specifically in the five-county area surrounding Greensboro.

    Sentara CEO Howard Kern would become CEO of the new organization, while Cone's Akin would stay in Greensboro as president of the Cone Health division. The resulting system's corporate headquarters would be in Norfolk. In an interview, Kern stressed the deal would be a straight merging of assets, not an acquisition, with no money changing hands.

    Kern and Akin agreed the biggest draw to the deal was their aligned views on the importance of value-based payment arrangements and the need to deliver higher-quality care in a way that's more cost effective.

    "I think that's what started our mutual respect for each other, and I think really our connection for this future merger," Kern said.

    Sentara's health plan, Optima Health, covers almost 900,000 people across Virginia and in Ohio through a partnership with Ohio Health. Pairing with Cone would expand that coverage into North Carolina.

    Akin said he's excited about being able to offer another choice for consumers and businesses in Cone's coverage area. That combined with Cone's existing Medicare Advantage health plan and accountable care organization would allow the resulting health system to align incentives around value-based care, he said.

    Neither health system has released financials for the quarter ended June 30. As of March 31, Sentara had a 3.5% operating margin, compared with 4.8% as of year-end 2019. Cone had a 1.7% operating margin as of March 31, compared with 2.8% as of 2019 year-end.

    Like their peers across the country, Sentara and Cone suffered from March into June with dampened procedure volumes because of the pandemic. But by the end of June, Kern said Sentara was back to about 95% of its expected revenue, and both CEOs said they have seen volumes return relatively quickly.

    Neither Kern nor Akin was able to share how much federal stimulus aid their health system had received. Some business and regulatory leaders have sought to ensure the $175 billion in grants Congress set up to keep healthcare providers afloat at the height of the pandemic don't spark a wave of consolidation. The Pacific Business Group on Health, for example, a consortium of 41 private employers and public purchasers, asked Congress to make healthcare providers pledge not to engage in M&A for 12 months as a condition of receiving stimulus money.

    Kern and Akin said the money they received was very much needed to offset losses, but was not a windfall. Kern maintained that this deal is not an acquisition.

    The Federal Trade Commission stressed in March that the agency doesn't plan to relax its scrutiny of anticompetitive transactions, despite the difficult circumstances caused by the pandemic.

    Transactions involving health services organizations were down more than 21% year-over-year through the first half of 2020, but M&A experts expect that to pick up in the latter half of the year. The pandemic has also derailed or delayed some hospital M&A talks. Beaumont Health called off its plan to acquire Summa Health in late May. The following month, Beaumont and Advocate Aurora Health announced plans to merge.

    Both Sentara and Cone have had a "longstanding commitment" to no layoffs, and that's not changing in the immediate term, Akin said. If the deal closes, the resulting system would focus on using attrition, reassignment and providing other opportunities to employees in lieu of layoffs, he said.

    Akin said he thinks Cone's employees should be excited about working for a more diversified organization where they'll have more professional opportunities.

    "Certainly at Cone Health we view this as very much additive," he said. "No one will be giving anything up. If anything, I believe those in our communities will be gaining options and gaining pathways to further their healthcare."

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