Merger of Abington, Jefferson is sign of the future

Abington Hospital. ( ED HILLE / Staff Photographer )

The planned merger of Abington Health and Jefferson Health comes amid a surge in hospital consolidation that is likely to grow.

The University of Pennsylvania Health System and Lancaster General Health said this week they were in talks for a deal, and last week, the Crozer-Keystone Health System put itself up for sale.

The Jefferson-Abington merger could prompt even more deals in the area, experts said.

"It could catalyze other hospitals that might be threatened by this announcement and feel more pressure to either join them or to do something else," Daniel M. Grauman, president and chief executive of DGA Partners, a consulting firm in Bala Cynwyd, said Thursday.

One clear pattern is that financially strong health systems are teaming up with one another because they see new challenges in the future, such as taking on more financial risk from insurance companies, shouldering massive costs for information technology, and eventually being responsible for managing the health of populations - a forward-looking concept that means they need to keep track of everybody, not just those who show up in the doctor's office or emergency room.

The Abington and Jefferson deal is an example of two strong systems teaming up. Standard & Poor's this month affirmed its "A" rating for Abington, citing unrestricted reserves of $676 million, enough to pay for 338 days of operations and more than twice its long-term debt.

Jefferson also has an "A" rating, though much of its debt is now in an unsecured credit line that will eventually have to be refinanced into new bonds.

The University of Pennsylvania Health System and Lancaster General both have "AA-" ratings from Standard & Poor's. There is no timetable for Penn and Lancaster General to finalize a deal. It's also not known what form a deal would take, or whether Penn would acquire Lancaster General, as it did Chester County Hospital in West Chester last year.

"The first preference of the bigger, stronger place is always to have ownership. If for whatever reason that is not possible, you back off to something else," said Alan Zuckerman, president of Health Strategies & Solutions Inc. in Philadelphia.

"Ultimately, academic medical centers like Penn want to have wide networks. The tighter the network, the better," he said. "Weaker institutions tend to go begging."

That may well be the case with Crozer, which needs a significant infusion of capital to update its physical plant. That points to the possibility of selling to a for-profit company.

Grauman said another possibility for Crozer was that an insurance company could take over the operations and cut costs by managing the care of the elderly and the poor.

One expert said he was skeptical the Abington-Jefferson deal would be completed.

"On a scale of one to 10, I would give it a two that it will get done," said Joshua A. Nemzoff, president of Nemzoff & Co. in New Hope, a mergers and acquisitions adviser to nonprofit health-care organizations.

In the end, Nemzoff said, neither the Abington board nor the Jefferson board will want to give up control. The even split of board seats between Abington and Jefferson for a new holding company means gridlock is likely, he said. "What they are really saying is, 'That way neither of us will have control,' which is the dumbest structure you can possibly pick."

In an interview Wednesday, Stephen Klasko, president and chief executive of Jefferson, discounted doubts about the structure he and his counterpart at Abington, Laurence Merlis, have proposed.

"Anybody who doesn't get it doesn't understand the future of health care," Klasko said.

Of the frenzy of merger activity generally, Grauman said: There's a question of whether "they will all stand the test of time and whether they will ultimately deliver the value down to where it's needed, where patient care is delivered."