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CHS Poised to Become Two-State Hospital Giant
YOUNGSTOWN, Ohio – Sharon Regional Health Systems’ decision to enter into a potential purchase agreement with Community Health Systems Inc. is a “good strategic move” for the rapidly growing for-profit system, a member of Sharon Regional’s board of directors says.
The potential deal also fits into CHS’s growth strategy, and Sharon Regional could wind up, along with the Akron General Health System that CHS plans to purchase with the Cleveland Clinic, as part of the same local operating group as ValleyCare Health System of Ohio, despite the state border, an industry analyst says.
Sharon Regional, which operates a 251-bed accredited hospital along with 23 satellite centers located in western Pennsylvania and northeastern Ohio, announced late Tuesday that its board of directors voted to execute a nonbinding letter of intent to sell its assets to Community Health Systems (READ STORY). A definitive agreement is expected later this year.
CHS, based in Tennessee, purchased the assets three years ago of the former Forum Health system in Mahoning and Trumbull counties, including Northside Medical Center in Youngstown, Trumbull Memorial Hospital in Warren and Hillside Rehabilitation Hospital in Howland. The hospitals and affiliated operations were rebranded subsequently as ValleyCare Health System of Ohio.
Health-care reform is “affecting everyone everywhere in the industry “so aligning ourselves with potential partners was just a good strategic move,” said Angela Palumbo, administrator at Pennsylvania CareerLink in Sharon, Pa., and a member of Sharon Regional’s board of directors.
The unknowns surrounding health care “made us all start to think that strategically it was better to partner or align ourselves with a positive influence,” she said. “We just felt like … if you want to grow, you’ve got to do things differently.” Such alliances are happening everywhere she noted, and the Sharon Regional board’s decision to pursue one was in the best interests of the system’s communities, employees, physicians and patients.
The disclosure that Community Health Systems is poised to purchase Sharon Regional follows last week’s announcement that CHS and the Cleveland Clinic, with which CHS formed a strategic alliance in March, had entered into negotiations to acquire Akron General Health System.
In late July, CHS also announced it had entered into a $7.6 billion merger agreement with Health Management Associates Inc. If that deal is approved and meets regulatory requirements, CHS would own more than 200 hospitals in 29 states. Last year, CHS announced plans to affiliate with hospitals and health-care systems in Pennsylvania, Texas and Illinois.
CHS has a strategy of “iterative or sequential acquisitions,” said Sheryl Skolnick, managing director and co-director of research at CRT Capital Group LLC, a Connecticut financial services company that tracks CHS.
“They are an acquisition-driven company,” Skolnick said. “They’re a consolidator of the hospital industry and what we’ll call small-city or non-urban hospitals have been their specialty, as opposed to the large urban medical centers. So this very much fits the profile of what Community has purchased in the past, and what they’ve said they want to purchase in the future.”
In particular, purchasing Sharon Regional would be “very much along the lines of what” CHS has done historically in Pennsylvania, where the for-profit company has made a number of acquisitions and where they understand the economic, regulatory and demographic environment, Skolnick said.
“Sharon is an interesting market in that it’s so far west in Pennsylvania” that it abuts properties CHS has purchased in northeastern Ohio, namely the ValleyCare system, “where they’re having some labor issues” and the union representing Northside’s registered nurses is “pretty upset” with the company, Skolnick said.
“There’s all kinds of dynamics going on in that marketplace that need to be worked out, so it’s very interesting to me,” she continued.
With its ValleyCare system and the potential purchases of the Akron and Sharon properties, “It sounds almost as if they’re trying to create a little min-region to perhaps get some scale economies or some leverage of regional management, or maybe even some managed care contracting leverage,” the analysts continued.
Although Youngstown, Akron and Sharon are “not exactly next door to each other” and Sharon is separated from the other two markets by the Ohio-Pennsylvania border, CHS might look at “one regional management structure for that region” rather than affiliate Sharon Regional with its existing Pennsylvania properties, Skolnick continued.
The northeastern Ohio and Pennsylvania properties could be operated by a single organizational entity with oversight over the corporate entities formed in the two states. A similar arrangement is in place for properties operated by CHS competitor HCA Healthcare in Kansas City, which is divided by a river, with Missouri on the east and Kansas on the west.
“Typically it would have to be a separate subsidiary [for the Ohio and Pennsylvania properties] but that subsidiary could be in turn owned by another subsidiary that has oversight over the whole region,” Skolnick explained.
The CEO of Sharon Regional, John "Jack" Janoso Jr. spent much of Tuesday meeting with the system's 1,800 employees to discuss the potential purchase by CHS, said Ed Newmeyer, spokesman.
In the official announcement of the intent to sell the system, Janoso said, “In CHS and the Cleveland Clinic we believe we’ve found partners that will support both our guiding principles and our values of integrity, caring, accountability, respect and excellence, and that this affiliation can advance our mission of providing comprehensive, convenient, high-quality health services close to home for the communities we serve.”
An industry-backed study, “How Hospital Mergers and Acquisitions Benefit Communities,” conducted by the Center for Healthcare Economics and Policy, points to the benefits of such mergers and acquisitions. The report found that the vast majority of mergers and acquisitions involved expansion into new areas or occurred in areas where there were more than five hospitals, ensuring that patients had alternative sources of care.
“Hospitals are responding to the call for better coordinated, high-quality care by moving away from a structurally fragmented care system. They are meeting that expectation by building a continuum of care that involves physicians and other caregivers to improve patient care,” said Rich Umbdenstock, president and CEO of the American Hospital Association. “Hospitals are collaborating with others ultimately to benefit the patients and communities that hospitals serve.”
Representatives of CHS and its ValleyCare affiliate both expressed enthusiasm toward the potential deal.
CHS usually doesn’t normally discuss non-binding agreements, said Tomi Galin, CHS vice president for corporate communications. “I can tell you we are excited about the prospect of an affiliation with Sharon Regional Health System,” she said. “When we get to the point of a definitive agreement, and the terms of the transaction have been finalized, we’ll look forward to sharing more,” she said.
Officials at ValleyCare of Ohio were made aware of the Sharon Regional announcement and potential affiliation Tuesday night, said Trish Hrina, ValleyCare vice president of marketing and public relations. “It’s an exciting development and we look forward to learning more as the negotiations are completed,” she remarked.
She said she did not have any information regarding whether a CHS-affiliated Sharon Regional would fall under the ValleyCare umbrella. “I don’t believe those details have been finalized,” she said.
Copyright 2013 The Business Journal, Youngstown, Ohio.
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