With many deals delayed by the pandemic, 2020 turned out to be slower than anticipated for hospital mergers and acquisitions. But we’d expect the pace of mergers to quicken this year as health systems emerge from the winter COVID surge. The calculus centers on both strategy and security.
Having weathered the pandemic better than expected, many larger systems approach the market as opportunists, looking expand their reach and capabilities. And systems of all sizes are seeking scale to enable better access to capital and greater risk mitigation—now viewed as essential should they once again face a pandemic-sized shock.
As systems contemplate new combinations, they would be wise to learn from the high-profile combinations that fell apart last year. In our experience, many mergers are felled by the “social” issues: board seat allocation, leadership structures, or cultural mismatches. These types of challenges appeared to be behind the stalling of Advocate Aurora Health’s merger with Beaumont Health (which faced pushback from doctors and community stakeholders) and the demise of the combination of Intermountain Healthcare and Sanford Health (called off amid leadership turnover).
Any successful merger must not only present the financial rationale for partnership, but also make a clear case as to how a combined system will bring new capabilities that will improve care, access and experience for local consumers.
Expect scrutiny on deals to rise in the Biden administration with the likely confirmation of Department of Health and Human Services (HHS) Secretary nominee Xavier Becerra, who took a strict antitrust posture in reviewing hospital mergers and contracting during his tenure as California’s attorney general.
Prime will acquire St. Francis for a net of $350 million, with a $200 million base cash price and $60 million for accounts receivable.
California Attorney General Xavier Becerra has conditionally approved Verity Health’s application to transfer ownership of St. Francis Medical Center to Prime Healthcare. The Attorney General’s decision follows an earlier decision by the U.S. Bankruptcy Court of the Central District of California granting Verity’s request to reject the existing collective bargaining agreements which impose legacy cost structures that it said contributed to bankruptcy.
Becerra noted that his approval of the sale of St. Francis to Prime Healthcare “protect(s) access to care for the Los Angeles communities served” by St. Francis.
“The COVID-19 public health crisis has brought home the importance of having access to lifesaving hospital care nearby in our communities,” he said. “St. Francis Medical Center is not just an asset, it is an indispensable neighbor, it is the workers who serve the patients, and the doctors who save lives. We conditionally approve this sale to keep it that way.”
Prime Healthcare has built a reputation for saving financially distressed hospitals across the U.S., touting improved clinical quality. Healthgrades said Prime had hospitals named among the nation’s 100 best 53 times, and has been the recipient of several Patient Safety Excellence Awards.
The Attorney General’s office conducted an exhaustive review of the transaction for the past several months and carefully considered public input on the proposed transaction. The Attorney General’s approval includes conditions for the sale which Prime is currently reviewing. Pending a final ruling by the Bankruptcy Court, the transaction is expected to be completed this summer.
THE LARGER TREND
In early April, the U.S. Bankruptcy Court approved the Asset Purchase Agreement for the sale of St. Francis Medical Center to Prime. Under the agreement, Prime will acquire St. Francis for a net consideration of over $350 million, including a $200 million base cash price and $60 million for accounts receivable. In addition, Prime has committed to invest $47 million in capital improvements and extend offers of employment to nearly all staff.
The court also recently granted Verity’s request to reject the existing collective bargaining agreements with two unions that represent associates at St. Francis Medical Center, SEIU and UNAC. The court noted that Prime Healthcare was the only party to submit a qualifying bid for St. Francis and that without rejecting the existing CBAs, “St. Francis would not continue to operate as a going concern, and all of the UNAC (and SEIU) represented employees would lose their jobs.”
The court also noted that Prime and Verity had made multiple efforts to negotiate in good faith with the unions, and the parties devoted “hundreds of hours to negotiations,” but ultimately were unable to agree on new CBAs. Further, the court determined that one of the reasons for the hospital’s bankruptcy was the “legacy cost structure imposed by the existing CBAs.”
It then staid that the proposals were rejected “without good cause” by the unions. Prime said it negotiated in good faith and proposed increasingly generous offers to UNAC and SEIU with wages far above its existing agreements at its Los Angeles-area hospitals. Prime’s latest offer to SEIU maintained existing wages for roughly 90% of SEIU members, and increased wages for some of them. Prime said these wages would be substantially higher than those recently voted by SEIU members at three of Prime’s Los Angeles hospitals.
ON THE RECORD
“Receiving conditional approval is an important step in ensuring Prime is able to preserve the St. Francis mission for the benefit of associates, members of the medical staff and most importantly the patients and Southeast Los Angeles community that has relied on St. Francis for 75 years,” said Rich Adcock, CEO of Verity Health.
“We are honored to be selected to continue the St. Francis legacy and are working to review the conditions and finalize the sale as quickly as possible,” said Dr. Sunny Bhatia, CEO, Region I and chief medical officer of Prime Healthcare. “St. Francis’ mission is especially critical during this pandemic and we honor the service of all caregivers. Prime has already started investments at St. Francis that will enhance patient care as we commit to continue every service line, community benefit program, charity care and expand new services to the community.”
It’s easy to become numb to the numbers we’re bombarded with on a daily basis—case counts, deaths, financial losses, unemployment claims, bailout funding. An article from the Washington Post this week put a very human face on how the coronavirus crisis is playing out on the ground, profiling the experience of 115-bed Griffin Hospital in Derby, CT.
We first got to know Griffin, and its CEO Patrick Charmel, years ago in the course of work for our former employer. It’s a remarkable, fiercely independent organization—recognized as the flagship hospital of the “Planetree” patient-centered care model, and a decade-long fixture on Fortune’s list of Top 100 Best Companies to Work For. But the COVID-19 wave hit Griffin hard, as it did much of Connecticut.
With the high cost of caring for COVID patients, and lost revenue from cancelled procedures, Griffin has had to make hard decisions about furloughing and redeploying staff—incredibly difficult for a small facility that has been a pillar of the community for a century. Charmel has been able to secure some relief in the form of advance payment from Medicare, but his efforts to lobby for a share of the state’s allocation of CARES Act grant funding for hospitals proved unsuccessful, and so the future of the hospital—or at least its continued viability as an independent organization—is in jeopardy.
In the words of Griffin’s chief financial officer, “This could be devastating for us.” As the recovery begins, and questions begin to be asked about the billions of dollars of “bailouts” paid to “greedy hospitals”—an easy narrative for the media to latch onto—it’s worth remembering what’s happening to Griffin Hospital, and to hundreds of other similar organizations across the country.
Countless communities rely on these hospitals, and their survival is worth safeguarding.