June 24, 2013

ECHN nearing merger deal with for-profit hospital network

Photo | Steve Laschever
Photo | Steve Laschever
Eastern Connecticut Health Network President and CEO Peter J. Karl said his hospital network is nearing a merger deal.

Eastern Connecticut Health Network at a glance

Financials:

2012 Revenues: $305.8 million

2012 Expenses: $301 million

Net income: $3.7 million

Key subsidiary units:

Manchester Memorial Hospital

Rockville General Hospital

Eastern Connecticut Medical Professionals

Key Metrics (2012)

Total inpatients treated:11, 351

Total emergency department visits: 72,225

Eastern Connecticut Health Network is nearing a deal to sell itself to a for-profit hospital operator in what will be the latest merger in the state's rapidly consolidating health care industry.

The move, which has been in the works for 18 months, could be announced in the next week or so, officials say.

ECHN has been talking to as many as six interested buyers, but is now in final negotiations with two for-profit hospital operators, said ECHN President and CEO Peter J. Karl.

Karl declined to identify ECHN's suitors, but several other Connecticut hospitals are in merger negotiations with Nashville's Vanguard Health Systems Inc., which owns and operates 28 acute-care and specialty hospitals across the country.

Any deal would require ECHN to convert from a nonprofit to a for-profit entity. It's a transition that is suddenly becoming commonplace in Connecticut, which has historically been resistant to for-profit hospitals.

But cash-strapped community hospitals say they are running out of options to remain independent and rushing into the arms of larger networks to gain much needed scale and capital.

State and federal budget cuts along with major payment reforms related to the Affordable Care Act are also putting pressure on hospitals' bottom lines, experts said.

“We need to create enough scale to lower our costs by 15 to 20 percent,” said Karl, the ECHN CEO.

Karl said ECHN, which is the parent to Manchester Memorial and Rockville General hospitals, is facing financial headwinds like the rest of the industry and put out a request for proposals at the end of last year seeking a merger or affiliation partner.

The hospital system made a $3.7 million profit on $325 million in revenue — a less than 1.2 percent return — in fiscal 2012. It is facing legacy cost issues as well as funding cuts from government payers that will likely put the system in the red for the foreseeable future.

With recent state budget cuts, the federal government's sequestration and expected declines in Medicare and Medicaid reimbursements, ECHN is projecting a $6 million revenue hit this fiscal year, Karl said.

Next year, ECHN is expecting to take a $9 million hit to its bottom line.

“That will take us down a path that is not sustainable,” Karl said. “It won't allow us to reinvest in the organization.”

Hospitals are capital intensive businesses, requiring significant investments in facilities, personnel and technology to keep up with the demands of modern medicine.

Federal health care reform is adding additional pressure for hospitals to improve care quality while also reducing costs.

Besides budget funding issues, Karl said ECHN has aging infrastructure that will require a minimum $100 million investment in the coming years. That includes a major renovation of its 35-year-old operating room, a shift to private rooms, and a health IT upgrade.

Finding access to capital to make those investments is a major hurdle, Karl said.

ECHN is carrying a $100 million debt overhang, including a pension liability that is forcing it to set aside $13 million annually out of its operating revenue.

That is eating into the hospital systems ability to reinvest in its operations, Karl said. With a 1 percent margin, the hospital is barely breaking even.

As part of a merger agreement, Karl said ECHN will be able to retire its debt and gain greater access to capital. ECHN will also increase purchasing power and achieve much greater scale by partnering with a large health care system. That will make it cheaper to purchase supplies and consolidate back-office administration.

“We want to clean the slate so we can start fresh,” Karl said.

Consolidation is nothing new in Connecticut's health care industry. Almost every in-state hospital continues to be in deal-making mode as they face significant challenges from federal health care reform, and as they try to gain economies of scale.

Bristol and Waterbury hospitals, which are both nonprofits, are in talks to be acquired by Vanguard. Norwalk Hospital recently inked an agreement to affiliate with the Western Connecticut Health Network.

But deals aren't always easy to come by.

Recently St. Francis Hospital and Medical Center announced that its merger with for-profit Catholic hospital operator Ascension Health Care Network fell apart after months of negotiation. A complex deal that would have combined St. Mary's and Waterbury hospitals with Texas for-profit hospital network LHP Hospital Group also collapsed.

Quinnipiac University management professor Angela Mattie said one of the biggest hurdles that hospitals face in getting a deal done is merging their cultures, which can be more difficult than working out financial details.

“The business deals are easy,” Mattie said. “The greatest complexity is having the awareness of different cultures that exist within the organizations. That can make or break a deal.”

What the tidal wave of consolidation means to Connecticut's health care industry remains to be seen. Karl said he sees the state being dominated by three or four major hospital systems, that could include a for-profit operator that makes a major splash in the market.

He said he would not be surprised if even some of the larger systems in the state — Hartford Healthcare or Yale-New Haven Hospital — also decide to partner with a for-profit company.

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