Saturday, April 2, 2011

Scranton Sisters Sell Mercy

A judge cleared the way for Catholic Health Partners' sale of Mercy hospitals in Scranton, Nanticoke and Tunkhannock, Pennsylvania.  For-profit Community Health System (CHS) paid $150 million for the three hospitals and associated clinics, while promising to invest $68 million in capital improvements over a five year period. 

CHS didn't take all of Mercy Health Partners.  It left $214 million in Mercy liabilities with Catholic Health Partners.  It's not clear if these are pension agreements, retiree healthcare, professional contracts or professional liabilities.  I'm sure the judge and attorney general have the details.

The news provided details on the use of $68 million in capital

CHS Division President Martin Smith said he sees the need for renovations to Mercy Scranton's emergency room and updated equipment in the hospital's catheterization laboratory.
Emergency rooms are a high cost avenue for treatment.  Cardiac cath labs fit in the same category.  It doesn't bode well for health care costs decreasing anytime soon.  CHS had this to say at a Barclay's Capital conference in March:

ER Strategy: “The Front Door” of CHS’ Hospitals:

Renovations/Expansions – 54 projects completed, several currently under way
Marketing Programs - ER+
ProMed – Emergency room data tracking, quality management and measurement tool
Discharge call back implementation
Improved patient satisfaction
Contributed to same store admission growth
CHS's total commitment of $218 million vs. CHP's $214 million Mercy liabilities makes this a fire sale. The deal echoes Cerberus Capital's acquisition of Caritas Christi Health System. 

Community Health System committed to keep Mercy's Catholic mission.  It's not clear if they have a buyout clause like hellhound Cerberus.

Company officials said the Catholic and charity care policies at Mercy will remain in place.  
What is Mercy's historical level of charity care?  CHS states they gave 3.7% in charity care in 2010.  Did they make any concrete commitments to serve Mercy's charitable mission?  Here's one hint they're backing away:

As part of the sale agreement, two new foundations will be formed to help people who can't afford the health care they need.
Mercy's CEO Kevin Cook provided details on the foundations while praising his new partner:

CEO Kevin Cook. “In CHS we found not only a financially strong and operationally experienced hospital system, but an organization that respects our Guiding Principles and shares our commitment to improve the health of the community.”

 As a result of the sale, approximately $25 million of charitable assets will be maintained in the area. Catholic Health Partners (CHP), the parent company of MHP, has committed to provide approximately $20 million (based on the projected price and after all liabilities are satisfied) between two local, non-profit foundations.

One foundation will be created and governed by local community members from the current Boards of MHP, Tyler Health System Foundation and Mercy Healthcare Foundation. The foundation will receive the $2 million donation from a subsidiary of CHS and will retain oversight for the existing $3.5 million in the Mercy Healthcare Foundation.

A second foundation will be created and governed by the Sisters of Mercy, Mid-Atlantic Community, the original sponsors of MHP, to focus on providing services that develop healthy communities and support the well-being of poor and under-served persons.
That doesn't exactly sound like paying for care needed by poor persons.  It's a shame CEO Kevin Cook won't stick around to clarify.

Look for more nonprofit community hospitals to sell out, a concern I voiced over a year ago. The prospect has CHS CEO Wayne Smith salivating:

"We continued to expand our portfolio of hospitals in 2010 with a very selective acquisition strategy. We believe there are a growing number of independent hospitals that fit our criteria and can benefit from having a proven operator manage their facilities. With the ongoing uncertainties in the economy, and especially with respect to healthcare regulation, we believe there are even greater opportunities ahead for Community Health Systems to make suitable acquisitions."
Suitable?  In the case of Mercy, it was a three piece suit, Scranton, Nanticoke and Tunkhannock.  It will soon be part of CHS, which stated in its last earnings release:

The Company's guidance does not take into account resolution of certain pending government investigations and lawsuits.

In such a case, it helps to own a chunk of Mercy.