Two Missouri-based hospital operators, BJC HealthCare and Saint Luke’s Health System, are the latest to join the trend of large-system mergers.
The two signed a letter of intent to form an integrated not-for-profit Missouri-based health system Wednesday. The systems will work to reach a definitive agreement “in the coming months” with a closing anticipated by the end of the year if regulators sign off.
The new system would serve the largest major metropolitan areas of the state; BJC is based in the St. Louis region and St. Luke’s is in Kansas City. Regulatory hurdles must first be cleared.
“Amid the rapidly changing health care landscape, this is the right time to build on our established relationship with Saint Luke’s. With an even stronger financial foundation, we will further invest in our teams, advance the use of technologies and data to support our providers and caregivers, and improve the health of our communities,” Richard Liekweg, BJC’s president and chief executive officer, said in a statement.
BJC had $6.3 billion of revenues in 2022 and St. Luke’s had $2.4 billion. The systems posted an announcement on the Municipal Securities Rulemaking Board’s EMMA bond disclosure website but did not include their intentions for each system’s debt.
The systems said the merger would allow it to invest in “the tools, training, and technologies needed to attract and retain the best and brightest in health care” while preserving $1 billion in annual community benefits.
The new system would maintain each of the existing brands and operate from dual headquarters: one in St. Louis serving eastern Missouri and southern Illinois, and one in Kansas City serving western Missouri and portions of Kansas.
Liekweg will serve as CEO of the integrated health system with the initial board chair of the integrated system coming from Saint Luke’s.
Each chain brings more than a dozen hospitals to their planned combination. BJC also operates multiple health service organizations and St. Luke’s has more than 100 primary care and specialty offices.
Both have academic affiliations and the merger allows them to expand their footprints and leverage their size going forward.
Moody’s Investors Service in April affirmed BJC’s Aa2 rating and stable outlook ahead of a new issue saying the system benefits from its prominent reputation as a leading academic medical center and long-standing affiliation with Washington University School of Medicine.
“BJC’s large scale and favorable market position will also help support the anticipated return to good margins, which were suppressed in fiscal 2022 due to industrywide labor shortages and volume softness,” Moody’s said. “Beyond high labor costs, challenges include ongoing losses at Memorial Hospital, and limited growth prospects in St. Louis. To expand its presence, BJC would likely need to consider additional affiliations and partnerships in other markets.”
S&P Global Ratings also in April affirmed BJC’s AA rating and stable outlook that “reflects our view that BJC’s balance sheet will remain sufficient to compensate for a period of weaker margins, although we believe incremental improvement in earnings is necessary to generate sufficient cash flow to retain overall balance sheet strength while also funding significant capital projects. BJC’s enterprise strengths including market position and relationship with WUSM also support the outlook.”
Moody’s affirmed St. Luke’s A1 rating and stable rating in a May report. S&P rates the system A-plus and stable.
The system benefits from “its broad market reach around Kansas City, its position as the primary teaching hospital for the University of Missouri – Kansas City School of Medicine, and its provision of quaternary services,” Moody’s said. “Although below average for the rating category, days cash will remain solid, augmented by the presence of restricted cash.”
The St. Luke’s system will face considerable competition from several sizable for-profit and large system providers that are also investing in growth strategies in its markets, Moody’s added.
The number of hospital consolidations for the first quarter still lags pre-COVID-19 pandemic first quarters but the revenue side of the equation rose to levels not seen since 2018.
The first quarter saw 15 announced transactions that involve $12.4 billion of revenues, according to advisory firm Kaufman Hall’s quarterly look at not-for-profit and for-profit hospital mergers and acquisition activity.
The number jumped from 12 in the first quarter of 2022 and 13 in 2021 but remains far behind the 29 in 2020, 27 in 2019, and 30 in 2018. The revenues involved, on the other hand, stood out, ballooning to $12.3 billion from $3 billion in 2022, $8.8 billion in 2021, $5 billion in 2020, $4.9 billion in 2019, landing just shy of the previous recent peak of $12.7 billion in first-quarter 2018.
“The trend of fewer but larger transactions that characterized 2022 was maintained — the average size of the seller or smaller party in Q1 was $827 million, just below last year’s historic year-end average of $852 million,” the report said. “Kaufman Hall experts believe that a new type of post-pandemic activity is taking shape as health systems adapt to a new environment of razor-thin — and for many organizations, negative — operating margins.”
The first quarter’s number tracked closely with the 17 transactions announced in the final quarter of 2022. Last year, 53 announced transactions involved more than $45 billion in total revenue, which exceeded a high of $44 billion in 2017 although the number of deals remained below pre-COVID-19 pandemic numbers.
Operational and financial headwinds are rising as a factor in consolidation activity and Kaufman Hall said it expects those pressures may prompt a new wave of transaction activity, with a trend toward partnerships that cross state borders and regions.