Philly area hospitals verge on merger mania

It's not unusual for hospital chief executives in the Philadelphia region to talk to each other about possible mergers, trying to decide which competitor would be a good fit.

But such talks have gone into overdrive since last fall, with three deals signed or completed and two systems - Crozer and Aria - now working with financial advisory firms to find buyers to help them through the hard times expected in coming years.

Similar searches are happening across the country as hospitals face intensifying competition for dwindling numbers of inpatients, heavy capital demands to expand outpatient reach, and the gradual cuts of Medicare payments under Obamacare.

"In most major markets, there are several hospitals in play, using the help of either an investment banker or consultant, to find a partner," said Daniel M. Grauman, president of DGA Partners, a consulting firm in Bala Cynwyd.

Here's a rundown of recent activity in the region:

Aria Health, which owns two hospitals in Northeast Philadelphia and one in Langhorne, is the latest to say it hired an investment bank.

The system is hard to evaluate because it does not publish financial statements, as do most others.

But numbers released Thursday by the Pennsylvania Health Care Cost Containment Council showed that Aria's results fell to negative 5.7 percent in the year ended June 30, from positive 8.8 percent the year before.

An emergency department expansion project, from April 2013 to July 2014, at Aria's Torresdale campus was partially to blame for the decline, a spokeswoman said.

Aria has the advantage of a low debt load relative to its size, despite having secured a private loan last year of up to $75 million. That gives it financial flexibility that heavily indebted systems don't have.

By late summer, Aria's board is expected to decide whether to accept any of the offers its investment bank has lined up, a spokeswoman said.

Crozer-Keystone Health System, which serves much of Delaware County with its four hospitals, said in October that it hired Kaufman, Hall & Associates to explore whether to make a deal or stay independent.

Industry observers were not surprised, because Crozer has been losing money and is in desperate need of capital to upgrade its facilities, which last May had a very high average age of nearly 20 years, according to Moody's.

The fact that a deal hasn't been announced more than six months after Crozer hired its advisor is probably not a good sign or could mean that Crozer is asking for too much, sources said.

The pending sale of Mercy Suburban Hospital, at Route 202 and Germantown Pike in East Norriton Township, to Prime Healthcare Services Inc. shows that it takes more than a solid location to ensure financial success.

Mercy Suburban's owner, Trinity Health, last year wrote down the value of the hospital by 65 percent, to $17.3 million from $48.8 million. The price has not been disclosed, but the agreement calls for Prime to invest $30 million in the hospital in its first five years of ownership.

The write-down indicates that Mercy's parent neglected to invest in the hospital, even as Einstein Healthcare Network in 2012 opened a new hospital two miles away, analysts said.

Among the region's largest systems, the appetite for deals is either sated for now or doesn't exist.

Thomas Jefferson University is working through its merger with Abington Health, and the University of Pennsylvania Health System has a big deal in the works with Lancaster General Health.

Main Line Health, which has robust finances, is staying on the sidelines for a different reason, chief executive Jack Lynch said.

"We don't feel the need for a partner," he said.

Executives and board members may have to seek outside help, but that doesn't always lead to a brighter future.

After several years of operating losses, Underwood-Memorial Hospital in Woodbury merged in 2012 into what is now called the Inspira Health Network, of Vineland.

Operating losses at the hospital have continued, and Woodbury officials said last month that Inspira was exploring alternatives for the hospital, including closure.

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