CHI Franciscan's eight acute-care hospitals are scattered throughout the Puget Sound region, all within about an hour of Seattle. With nearly $2.5 billion in annual revenue, it's one of the largest health systems in Washington state. It doesn't have any hospitals in Yakima, where Virginia Mason's hospital dominates the market.
Competitors in the Seattle-Tacoma region include Renton, Wash.-based Providence, which has eight hospitals in the area, including five it picked up in 2012 when it acquired Swedish Health Services. Tacoma-based MultiCare has five hospitals in the Tacoma area.
Washington requires pre-transaction notification for hospital mergers, a process that affords the state's attorney general significant discretion in reviewing such transactions, Marlow said. Historically, that office has been particularly aggressive in ensuring deals don't create opportunities to increase rates.
CHI Franciscan's parent company, CommonSpirit, has struggled to find its footing since its early 2019 merger. The massive system didn't generate an operating gain until the quarter ended Dec. 31, 2019, and even that was short lived. The system plunged back into the red the following quarter, posting a $145 million operating loss as the pandemic caused expenses to spike and volumes to plummet 40%. As of July 10, CommonSpirit had received $1 billion in federal grants from the Coronavirus Aid, Relief, and Economic Security Act.
CHI Franciscan comprises approximately 10% of CommonSpirit's revenue, according to a spokesperson.
Virginia Mason has had struggles of its own. The two-hospital system posted modest operating losses in each of the past two fiscal years, including a loss margin of 0.8% in fiscal 2019 on about $1.2 billion in revenue.
Its flagship hospital, 336-bed Virginia Mason Medical Center in Seattle, lost about $625,000 on operations in 2018 on $1.1 billion in total operating revenue, according to the most recent data available. Virginia Mason Memorial, a 226-bed hospital in Yakima, lost $5.5 million on operations in 2018 on $469 million in total operating revenue that year, state data show.
Kaplan expressed skepticism that hospital consolidation actually improves quality, access and saves money in a September interview with Seattle Business.
"The real impact is to increase prices," he said at the time. "I don't think that's what our communities or our society need."
This deal will be different, Kaplan explained in an interview Wednesday, because it will allow Virginia Mason to expand its Toyota-inspired management process for cutting costs and boosting quality across CHI Franciscan.
"We see this as a way to continue to create value and not to raise costs and power in the market, to do something special that hopefully can be a model of what's possible for healthcare in our communities," Kaplan said.
CHI Franciscan began piloting the so-called Virginia Mason Production System at one of its hospitals two years ago and plans to expand that throughout the system in the coming years, Patel said. So far, it has improved physician productivity where it's been implemented, he said.
Virginia Mason is "extremely" well known for its management process, and is a training destination for healthcare industry leaders who want to make their operations more efficient, said Kevin Holloran, a senior director with Fitch Ratings.
"I can't imagine this would be anything but a great positive for CommonSpirit to learn from really one of the best on process and throughput and Lean techniques and technology," he said.
CHI Franciscan adheres to the Catholic Church's Ethical and Religious Directives for Catholic Health Care Services, or ERDs, a list of rules that forbids services like abortion, contraception, tubal ligation, gender transition surgery and physician aid-in-dying, which is legal in Washington. If the deal goes through, Virginia Mason also would not provide certain reproductive health services or physician aid-in-dying, a spokesman said. He did not say whether Virginia Mason would comply with the ERDs in their entirety.
The news came as a surprise to reproductive rights advocates, said Leah Rutman, healthcare and liberty counsel for ACLU Washington. She said her organization plans to discuss the issue with Virginia Mason.
"It's extremely, extremely disappointing and problematic that we are finding out about this affiliation," she said.
Rutman said there are plenty of examples of mergers between secular and religious hospitals in Washington resulting in restricted access to reproductive and end-of-life services, a trend that has disproportionately affected women, LGBT communities, people of color and those living in rural areas.
When Swedish affiliated with Providence, for example, its facilities stopped offering a range of abortion services, Rutman said. When what was formerly Harrison Medical Center became part of Catholic Health Initiatives, its facilities stopped providing services under the state's Death with Dignity Act, she said.
Although COVID-19 has put some healthcare transactions on hold, insiders say the pandemic ultimately will push more financially distressed providers to seek acquisitions, mergers or other partnerships. Some business groups, fearing the CARES Act grants could prompt opportunistic mergers, asked Congress to make providers hold off on M&A for a year as a condition of receiving federal aid.
The Federal Trade Commission, for its part, has pledged to apply the same scrutiny it did before the pandemic when it comes to reviewing proposed transactions.
