Could PinnacleHealth purchase bring new vistas for four midstate hospitals?

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Reeling from a $1.7 billion loss in 2016, Tennessee-based Community Health Systems Inc. (CHS) is plowing ahead with a divestiture plan that encompasses 10 transactions covering 30 hospitals across the country.

The facilities on the block include Lancaster Regional Medical Center and Heart of Lancaster Regional Medical Center in Lancaster County, Memorial Hospital in York County and Carlisle Regional Medical Center in Cumberland County. Harrisburg-based PinnacleHealth Systems this spring entered into an agreement with for-profit CHS to acquire the quartet, although the price has not been disclosed.

The move also comes at another critical juncture, as PinnacleHealth looks to affiliate with the University of Pittsburgh Medical Center.

Amid CHS’ struggles, how have its four local hospitals been faring in recent years? And what might the future hold for them under PinnacleHealth operation?

Officials with the two health organizations have very little to say.

Pinnacle Health and a spokeswoman for the Lancaster hospitals declined comment, while a spokeswoman in Carlisle never responded. A CHS spokeswoman also did not respond to a request for comment, but did say earlier this month that the sale “remains on track and is expected to close in the second quarter this year.” A spokesman in York responded briefly to questions about the future of a construction project at Memorial Hospital.

The Business Journal turned to reports by the Harrisburg-based Pennsylvania Health Care Cost Containment Council to gain a sense of each facility’s financial performance, and to expert observers for analysis of how the acquisition came about and what its impacts on patients, physicians and users could be.

“I think it’s a good thing,” said Patrick Michael Plummer, a professor of health administration at Penn State Harrisburg.

Plummer believes that the deal will bring down costs for consumers who use the facilities — and the PinnacleHealth system — by achieving greater economies of scale, especially in areas such as systems and records integration.

He also believes it’s a savvy purchase on PinnacleHealth’s part.

“From a business perspective, you look for an undervalued asset that could be improved,” Plummer said. “Improvement adds value, and if it was an underutilized, undervalued asset, an improved facility benefits everyone.”

Finances, size

With no information on the potential sale price, it’s hard to say whether the four hospitals are undervalued. Publicly available data reveal key revenue and expense trends, however.

Three of the four had positive operating margins in 2016, according to Pennsylvania Health Care Cost Containment Council reports. One, York Memorial, was into the red by 2.66 percent, however, and has shown an average negative margin of 1.14 percent for the fiscal years 2014-2016, the council reported.

• The largest of the CHS hospitals being sold to Pinnacle is the 214-bed Lancaster Regional Medical Center in Lancaster City.

The facility’s net patient revenues in 2016 were $115 million, with an operating margin of 19.83 percent, council statistics show.

Lancaster Regional’s key metrics remained relatively stable over the past three fiscal years, with overall growth in patient revenues and a decline in expenses. Net patient revenues were $114 million in 2013. They dipped to $112 million and $110 million in the next two years, before climbing back up to $115 million last year. Total operating expenses fell from $97 million in fiscal 2013 to $92 million in 2015 and 2016.

• Carlisle Regional Medical Center is the second largest of the facilities awaiting a sale to Pinnacle. According to the most recent state reports, from 2014-2015, it is licensed for 165 beds.

Its net patient revenues in 2016 were $114 million, council statistics showed, with an operating margin of 13.55 percent.

Carlisle saw both revenues and expenses decline from fiscal 2014 to 2016, however. Its net patient revenues were $136 million in 2013, subsequently falling to $131 million, $121 million and $114 million in the succeeding years. Total operating expenses declined from $106 million to $82 million over the same period.

• Heart of Lancaster Regional Medical Center in Warwick Township has 148 beds.

Its net patient revenues in 2016 were $62 million, council statistics showed, with an operating margin of 23.31 percent, but the facility has shown declines in both revenues and expenses in recent years.

The hospital had net patient revenue of $66 million in 2013, falling in the succeeding years to $63 million and then $61 million, before climbing back to $62 million last year. Expenses, on the other hand, went down from $53 million in 2013 and 2014 to $52 million in 2015 and $47 million last year.

• York County’s Memorial, at 100 beds, is the smallest of the four in size, although its revenues have shown an upward trend — but so have expenses.

Memorial’s net patient revenues in 2016 were $80 million, council statistics showed, but its total operating expenses were $83 million, making for an operating margin of negative 2.66 percent.

The hospital’s patient revenues climbed from $48 million in 2013 to $86 million the following year, the council reported, then dropped to $77 million in 2015. The report also shows that operating expenses were $48 million in 2013, jumping to $85 million in 2014. They were $84 million in 2015.

The report does not indicate why those numbers seemed to fluctuate after 2013. Hospital spokesman Jason McSherry said he would look to review and confirm the figures last week, but did not respond before press time.

Expansion project?

Memorial also stands out because it has a major new construction project in the works.

In May 2016, Memorial broke ground on what was billed as a $120 million, 102-bed replacement hospital at the site of the former Hawk Lake Golf Course in West Manchester Township. The land was purchased by Memorial Health Systems in 2008, before the organization was purchased by CHS in 2012.

More than a year later, there still isn’t much to see.

McSherry said site work and excavation activities to prepare the grounds for construction of the hospital structure have been progressing and are nearing completion.

“Under the proposed PinnacleHealth acquisition, PinnacleHealth is committed to moving forward with construction,” McSherry told the Business Journal.

Statewide trends

Except for Memorial, the hospitals’ operating margins are significantly outperforming the state average, which was 5.94 percent in 2016, the council found. They’re even doing better than PinnacleHealth, which had patient revenues of $897 million and operating expenses of $804 million in 2016, resulting in an operating margin of 12.9 percent.

That low statewide average points to another trend, and one that Memorial fits into: years of mounting losses.

Fifty-one of the state’s general acute care hospitals, or 30 percent, posted a negative operating margin in fiscal 2016, and many of them are operating in the red for the third consecutive year, said Paula A. Bussard, chief strategy officer for the Hospital and Healthsystem Association of Pennsylvania.

Without speaking directly to the PinnacleHealth transaction, Bussard said such losses are a reason why mergers can be beneficial.

“Consolidation can help smaller hospitals secure access to capital for technology and infrastructure, and achieve other efficiencies that ensure they can continue to be vital assets to the communities they serve,” Bussard said, adding that complementary services and locations mean consumers “can more easily get the right care in the right setting.”

At a time when hospital reimbursement sources face increasing uncertainty, consolidations, economies of scale and elimination of duplicated services can help systems manage Medicare and Medicaid payment reductions without having to cut services overall, Bussard added.

The result, she said, is more coordinated care and more resources to invest in other needs.

Evaluating outcomes

The potential impact of health care facility transactions is assessed by regulatory agencies before they are allowed to proceed, Bussard explained.

Proposed hospital mergers and acquisitions undergo “a rigorous review process” by the state Attorney General’s office and the Federal Trade Commission (FTC) “to preserve a dynamic and competitive health care environment,” she said.

There also are advocacy groups that speak on the public’s behalf as government officials mull hospital pacts. Antoinette Kraus, founding director of the Philadelphia-based Pennsylvania Health Access Network, said her group works to remind regulators how important consumer choice and access are.

“It all comes down to making sure folks don’t lose access to their doctors,” said Kraus, whose organization works to bring consumer voices into discussions about health care access and affordability.

Regulators don’t always give a green light, especially when there are signs that a deal might reduce competition and consumer access to care in a given region.

PinnacleHealth encountered resistance last year when the FTC and state AG’s office opposed its proposed merger with Penn State Health Milton S. Hershey Medical Center. A federal court ruling found that the merger would eliminate competition in the Harrisburg region, because the organizations are direct competitors.

Already, there have been suggestions that a similar concern could arise with the CHS purchase, particularly in Cumberland County,

There are three hospitals in Cumberland: PinnacleHealth’s West Shore Hospital, Carlisle Regional Medical Center and Geisinger Holy Spirit. If the CHS sale goes through, it would leave Pinnacle and Geisinger Holy Spirit as the county’s only competitors.

Could that be grounds for the FTC to flag PinnacleHealth’s separate plan to affiliate with the University of Pittsburgh Medical Center? Plummer acknowledged that the concern exists, but didn’t see it as a “material impediment.”

He also said that while the parties may be in the midst of a “quiet period,” as is common during mergers and acquisitions, he hasn’t heard any rumblings that would suggest any problems with the pact.

“My experience says that when there’s no news in this period, it’s moving forward as planned,” Plummer said.

If regulators were to raise red flags over Carlisle Regional Medical Center, Plummer said he suspects CHS and PinnacleHealth could move ahead by separating that property from the sale.

“I just don’t think it’s that much of a concern,” he said.