It’s not easy getting a hospital merger done these days.
Just ask St. Francis Hospital and Medical Center CEO Chris Dadlez. In January, Dadlez expressed optimism after St. Francis’ parent signed a letter of intent to pursue a merger with a Missouri-based, for-profit hospital operator.
The union, Dadlez said at the time, would allow the hospital to build a statewide, integrated healthcare delivery system. Privately, officials from both sides also hoped to leverage the deal to make another major acquisition in Connecticut.
The merger was complex: It would have required St. Francis to convert from a nonprofit to for-profit entity, a model not favored in Connecticut.
By June, the deal with Ascension Health Care Network (ACHN), a joint venture between Missouri’s Ascension Health and New York private equity firm Oak Hill Capital Partners, was dead.
What happened?
Property taxes and state budget cuts made it difficult to get the numbers to work, Dadlez said.
Pension issues also played a role, according to a source familiar with the negotiations.
Instead of forcing a bad deal, St. Francis decided to move in another direction.
“When ACHN discussions dissolved we took a deep breath and needed to rethink the marketplace,” Dadlez said in a recent interview.
As hospitals across the state jockey to find merger and/or affiliation partners, hospital executives are finding it increasingly difficult to get deals done. Waterbury, St. Mary’s, and Bristol hospitals have seen deals fail, or hit major stumbling blocks.
Dadlez said he is comfortable with St. Francis Hospital and Medical Center remaining an independent entity for now. The hospital, he said, isn’t cash-strapped: it generates enough money to fund its operations and reinvest annually about $42 million in facilities.
For fiscal year 2013, which ended Sept. 30, St. Francis will be in the black after losing money the previous two years, Dadlez said. Still, that doesn’t mean the hospital isn’t listening to more potential deals. In fact, talks are continuously ongoing, Dadlez said, although he wouldn’t disclose with whom.
“We have a number of folks ringing our door bell,” Dadlez said. “We want to be careful and think long and hard about the future. We don’t want to jump into anything that we really don’t understand. We are trying to find like partners — free-standing nonprofits that can create networks and not necessarily slam balance sheets together in a formal merger.”
ECHN play
Most merger and affiliation activity in Connecticut has involved larger hospital systems affiliating with smaller, cash-strapped community hospitals in need of fresh capital to invest in technology and infrastructure.
That wasn’t the case, however, with the St. Francis-Ascension deal. Dadlez said his hospital pursued the merger to chase another deal: a potential acquisition of Eastern Connecticut Health Network, the parent to Manchester Memorial and Rockville General hospitals.
Turns out, Ascension and St. Francis were one of three groups vying for ECHN, which had been looking for a merger partner the past few years.
“ACHN had notions of developing a Catholic system in Connecticut,” Dadlez said. Of course, neither deal happened.
ECHN is now in talks to be acquired by Vanguard Health Systems, a Tennessee-based for-profit hospital operator that has been exploring several deals in Connecticut. The ECHN deal also includes an affiliation with Yale-New Haven Health System (YNHHS), parent to Yale-New Haven Hospital.
“When we dissolved talks with ACHN, we no longer had a relevant proposal for ECHN,” Dadlez said. “We didn’t have capital to purchase a hospital of that significant size.”
Deal breakers
One of the key issues that derailed the St. Francis-Ascension deal was property taxes, Dadlez said. A conversion to a for-profit entity would have cost St. Francis its tax-exempt status, forcing the hospital to pay property taxes on its extensive real estate holdings.
In Hartford, St. Francis is a major landlord, which poses a challenge because of the city’s high commercial property tax rate. Ascension’s property tax bill in the Capital City would have been $34 million, Dadlez said.
“Property taxes were an issue,” Dadlez said. “ACHN underestimated the expense.”
Pension issues also complicated the deal, a source familiar with the negotiations said. As part of the merger, St. Francis and Ascension planned to combine pension plans, but there was uncertainty about whether that would be possible, said the source, who asked not to be identified because of the sensitivity of the negotiations. Earlier this year, there were several class action suits filed against Catholic hospital systems, challenging their ability to designate pensions as church plans, which exempts them from certain federal pension funding requirements.
Losing the exemption, would cost many Catholic hospitals millions of dollars because they would be forced to fund their pension plans at much higher levels, and pay premiums to the Pension Benefit Guarantee Corp., which insures certain pension plans.
That uncertainty made it hard to complete the merger.
Dadlez declined to go into specifics, but he did confirm pensions were an issue. Ascension Health did not return a request for comment.
State budget cuts, which reduced funding to Connecticut hospitals by about $500 million, also made Ascension skittish about the deal, Dadlez said.
With an outright merger no longer possible, Ascension offered an alternative deal: to purchase a 51 percent stake in St. Francis’ physician hospital organization (PHO) St. Francis HealthCare Partners.
St. Francis’ PHO is affiliated with more than 1,000 doctors who contract jointly with insurers. That gives them muscle when negotiating reimbursement contracts.
Dadlez said they weren’t comfortable giving up a majority stake. “We didn’t want to sell one of the best assets of the organization,” Dadlez said. “We wanted to take a step back and figure out what our next move is.”
Moving forward
With the Ascension deal in the rearview mirror, St. Francis officials say they are moving forward.
St. Francis board director Daniel P. O’Connell said mergers and acquisitions that combine balance sheets and real estate will be less important than clinical partnerships between hospitals and other providers focusing on improving care quality and outcomes.
Nationally, that is where the health care industry is moving, as providers are being asked to better manage their patients’ health, rather than just provide sick care, which tends to be inefficient and costly.
“We need alliances that allow health care entities to manage wellness,” O’Connell said.
St. Francis has a clinical partnership with Yale-New Haven Hospital around cardiac and transplant services. The hospital is also affiliated with Stafford Spring’s Johnson Memorial Medical Center.
St. Francis’ current focus — and selling point to patients and providers — is on maintaining clinical excellence, top notch facilities, and a smart management structure, Dadlez said.
He said St. Francis is one of the most efficient hospitals in the region and was the only Connecticut hospital to receive the Healthgrades 2013 Patient Safety Excellence Award, which recognizes the top 10 percent of U.S. hospitals that have the lowest occurrences of 13 preventable patient safety events.
St. Francis’ facilities, Dadlez said, are state-of-the art including its $180 million, 318,000-square-foot John T. O’Connell Tower, which opened in 2011 and houses a new emergency department and operating rooms.
This November St. Francis will open a new women’s center. The new patient tower has changed the face of St. Francis’ Hartford campus, but tapped out the hospital’s ability to pay for a major acquisition — unless they find a partner to finance the deal, Dadlez said.
“We must focus on what we can control,” Dadlez said. “We feel the marketplace is changing, and it’s not all about brick and mortar development and having the most hospitals in your system. It’s about who can compete on a quality and cost basis.”
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