CommonSpirit Health and Essentia Health canceled talks aimed at transferring ownership of one acute care and 13 critical access hospitals now operated by CommonSpirit.
The Chicago-based system with a broad national footprint had signed a non-binding letter of intent in January to explore the sale of its facilities in Minnesota and North Dakota that operate under its Catholic Health Initiatives, or CHI, brand to Duluth, Minnesota-based Essentia. CHI and Dignity Health merged in 2019 to create CommonSpirit.
Terms of the possible transaction were not disclosed in January so the impact on the outstanding debt of those specific facilities and on Essential’s debt portfolio was not clear. The two systems indicated they hoped to complete the transaction by this summer. The two systems did not provide a reason for calling off the deal but healthcare sector observers had considered it an example of a growing trend in consolidation where local expertise is a growing consideration.
"While we share a similar mission, vision, values and strong commitment to sustainable rural healthcare, CommonSpirit and Essentia were unable to come to an agreement that would serve the best interests of both organizations, the people we employ and the patients we serve," the two said in a joint statement Tuesday. “We’ve strengthened our relationship throughout this process and remain committed to possibilities in the future.”
The facilities include the full-service tertiary hospital St. Alexius Medical Center in Bismarck, North Dakota.
The handover was questioned by some local employees of the systems. The Minnesota Nurses Association and other employees at both Essentia and CHI hospitals earlier this month filed a petition with Essentia raising concerns over potential layoffs and negative impact on patients.
CommonSpirit operates 140 hospitals and more than 1,000 care sites across 21 states with fiscal 2020 revenues of $29.6 billion. The pandemic is blamed for a fiscal 2020, which ended June 2020, $550 million operating loss. The system last week reported third quarter fiscal 2021 showing a $117 million operating loss that underscored the pandemic’s continue impact. When adding in federal support and transaction funds, the system was able to generate operating income of $539 million.
Essentia Health operates 14 hospitals and other healthcare facilities in Minnesota, Wisconsin and North Dakota with $2.2 billion of revenues reported in the fiscal year that ended June 2020.
For CommonSpirit, the transfer would have allowed it to shed smaller facilities that have been especially vulnerable to the COVID-19 pandemic’s fiscal blows to the sector and allow it to focus on other long-term strategic plans.
For Essentia, the additions would expand its existing footprint in Minnesota and North Dakota and contribute to its leading market share within that footprint. It’s also viewed as having expertise in operating critical access hospitals. Essentia had recently divested of two critical access hospitals in Idaho and acquired an additional critical access hospital in Minnesota.
Rural hospitals generally headed into the pandemic in weaker shape than many in urban areas. Last year, 14 rural hospital had been shuttered by mid-August, bringing to 172 the number closed over the last decade, according to Kaiser Health News, citing data from the University of North Carolina-Chapel Hill.
Ahead of a more than $2 billion issue last October, rating agencies
Essentia carries ratings in the single-A category. S&P Global Ratings early last year affirmed the system’s A-minus and stable outlook. The system which implemented cuts and furloughs estimated the negative fiscal 2020 impact of the pandemic at $190 million. The system expects to open a
Sector participants are watching closely what path consolidation takes as the COVID-19 pandemic lingers and the in its aftermath as systems continue their effort to expand and leverage their scale while smaller hospitals seek out financially stronger partners.
While the sector was concentrated on managing the pandemic last year it “did not substantially alter hospital mergers and acquisitions,” according to a Kaufman Hall analysis. A total of 79 deals were announced, down from 92 a year earlier but it was also marginally higher than a decade low in 2010 of 74.
The not-for-profit and for-profit sector saw 13 transactions announced for the first quarter, down from the last several years including 29 for 2020 but the size of the transactions was more pronounced according to
Emerging trends include rising value in diversification and greater weight being placed on local market expertise and partnership over outright mergers which was underscored by the proposed Essentia-CommonSpirit deal.
