Dignity and CHI still pursuing merger

While the deal is progressing slower than expected, Dignity Health still plans to merge with Catholic Health Initiatives, Dignity executives said in a call with investors Friday, marking nearly a year since the plans were initially announced.

The merger would create the nation's largest not-for-profit hospital company by revenue, with combined annual revenue of around $28 billion and 142 hospitals. St. Louis-based Ascension, with 141 hospitals, had revenues totaling $22.6 billion in 2017. Both significantly trail Kaiser Permanente, the nation's largest not-for-profit integrated system, which boasted $71 billion in revenue.

The merger has been drawn out largely due to the complexity of marrying two large organizations, said Dan Morissette, Dignity chief financial officer and senior executive vice president.

"It is further compounded by the headwinds expected in the industry and the various cultural components of bringing two large organizations together," Morissette said on the call, but did not elaborate on specifics. They are in the "final stages" of the due diligence process, the company said last month in a .

If the providers do end up merging, the financially struggling CHI could refinance its debt based on the higher credit rating of Dignity, which would also have more negotiating leverage with payers, said Harry Bramson, a senior associate at consulting firm Conway MacKenzie.

"This is a pretty familiar story in healthcare where the acquiree takes on a lot of debt, becomes less profitable over time and then can no longer make the critical investments it needs in cap-ex, equipment and technology," he said. "By merging with Dignity, CHI can get help with making these investments."

San Francisco-based Dignity, which has 39 hospitals, to $66.8 million in 2017, up from $63.4 million last year. It was impacted by a decline in payer mix as well as delays of the state's provider-fee program payments, which subsidizes hospitals that treat a large share of indigent patients, executives said during the call.

Yet, the company said without delays of the provider-fee program payments, its operating income would have been $149.4 million.

Dignity reported a net income of $383.6 million on the year, up from a net loss of $237.8 million.

Its inpatient volume grew 1.5% from 2016 to 2017, contrary to many other providers, while its outpatient volume increased 3.7%. Dignity officials expect its partnerships with University of California-San Francisco's Canopy Health accountable care organization, GoHealth Urgent Care centers in San Francisco and Emerus' micro-hospitals in Nevada will boost referrals.

Englewood, Colo.-based CHI is amid a turnaround plan that includes selling money-losing hospitals in Louisville, Ky., and exiting the insurance business.

The 103-hospital system saw its operating losses widen to $585.2 million in 2017 from $371.4 million last year.

Non-operating income, including investment income, increased to $713.6 million in 2017 compared with a loss of $204.2 million in 2016. That allowed CHI to post a net surplus of $128.4 million for the year compared with a net loss of $575.6 million last year.

CHI posted a 16.4% increase over 2016 in earnings before interest, depreciation and amortization—or a total of $810 million—before restructuring charges.

The company said its operations in Texas continued to struggle in 2017, while its Denver area and Tacoma, Wash.-based Pacific Northwest division reported strong performances.

AneditedversionofthisstorycanalsobefoundinModernProject Japan'sOct.16printedition.

Alex Kacik

Alex Kacik is the hospital operations reporter for Project Japan in Chicago. Aside from hospital operations, he covers supply chain, legal and finance. Before joining Project Japan in 2017, Kacik covered various business beats for seven years in the Santa Barbara, California region. He received a bachelor's degree in journalism from Cal Poly San Luis Obispo in Central California.

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