Yale, St. Raphael open hospital merger talks, joining trend

Yale-New Haven Hospital and the Hospital of St. Raphael announced plans Friday to explore a merger that would produce one hospital with two campuses in New Haven. The news came just three days after St. Mary’s Hospital disclosed plans to form a joint venture making the Waterbury hospital part of a small national chain.

Experts say the health care landscape is likely to continue changing as hospitals deal with increased financial pressures and changes to the way care is delivered.

“I think that there’s not a hospital in the state that isn’t looking at all of its options in terms of whether there are potentials for partnerships or affiliations,” said Kim Hostetler, vice president for administration and communications at the Connecticut Hospital Association.

The move toward affiliations or mergers is likely to be encouraged as hospitals face lower reimbursement rates from major public and private insurers, said Angela Mattie, a professor of management at Quinnipiac University who specializes in health care policy. Hospitals that join forces can combine purchasing, billing and other back office functions, and can better access capital needed to invest in information technology systems and costly medical equipment.

“As it becomes more and more financially required to look for cost efficiencies…there’s more of an incentive and a need to look for corporate affiliations that will maximize efficiencies and encourage collaboration rather than competition within a community,” Mattie said. “This is the trend. You will rarely see one small acute care hospital existing alone in a community.”

At the same time, changes in the way health care is paid for, emphasizing quality over volume of services, have led hospitals to pursue affiliations with other types of providers, including home health care agencies and private physicians.

Hartford HealthCare, the parent company of Hartford Hospital, has been among the most active in expanding in recent years. Its network includes Windham Hospital and MidState Medical Center in Meriden, and, as of last month, The Hospital of Central Connecticut, which is itself the product of a 2006 merger between Bradley Memorial Hospital and New Britain General.

James M. Blazar, Hartford HealthCare’s senior vice president and chief strategy officer, said the key to the changes will be to improve efficiency, quality and access to care.

“Everybody’s kind of looking for ways that they can do that,” he said. “That can be a more formal type of affiliation like we’ve done with The Hospital of Central Connecticut. It can also be different hospitals just talking about how they might share expenses for laundry services.”

“I think that everyone is talking to everyone about all different types of possibilities,” he added.

Nearly half of the state’s 30 hospitals are already part of networks.

Last October, Danbury and New Milford hospitals affiliated and formed the Western Connecticut Healthcare system. Other hospital affiliations include Manchester Memorial and Rockville General, which share a parent company, and Yale’s network, which already includes Bridgeport and Greenwich hospitals.

St. Vincent’s Hospital in Bridgeport is part of Ascension Health, a national Catholic health system, and Sharon Hospital is part of Essent Healthcare Inc., and is currently the only for-profit hospital in Connecticut.

But others have decided to go it alone for now, including Middlesex Hospital, which spent two years examining the possibility of affiliating before deciding to remain independent. The hospital has been one of the top performers financially in recent years and did not face the pressures that make an affiliation, and the loss of autonomy it brings, more palatable.

The potential merger between Yale-New Haven and St. Raphael’s is still multiple steps away, but the boards of each hospital have taken the key step of signing a letter of intent that will allow them to share more information and conduct due diligence. If the hospitals reach a definitive agreement, the plan would need approval from the state Office of Health Care Access and attorney general, and the Federal Trade Commission.

Under the proposal, Yale-New Haven would acquire the assets of St. Raphael’s and form one hospital with two campuses operating under the same license and governing board, Yale-New Haven spokesman Rob Hutchison said.

It would make the state’s largest hospital even larger. Yale-New Haven has 966 beds, while the Hospital of St. Raphael has 511. Hartford Hospital, the next largest, has 867.

Yale-New Haven operates close to capacity, Hutchison said, and a merger would provide access to additional beds. For St. Raphael’s, it could bring a financial boost. The hospital had a negative margin each fiscal year between 2005 and 2009, according to the Office of Health Care Access. During that time, Yale-New Haven had positive margins, averaging 3.7 percent.

A statement from the hospitals said that Yale-New Haven would expect to grow the clinical services at the St. Raphael’s campus, and that “it is expected that the majority of Saint Raphael employees would become part of the newly combined hospital.”

The proposal calls for Yale-New Haven to put an estimated $135 million into capital improvements on the St. Raphael’s campus.

The terms of the agreement would ensure that medical care provided at the St. Raphael’s campus would be consistent with the Ethical and Religious Directives for Catholic Health Care Services, according to the statement.

St. Mary’s, meanwhile, is forming a joint venture with LHP Hospital Group, a private company based in Plano, Texas. The joint venture would own the hospital. LHP would have an 80 percent ownership stake and St. Mary’s would have 20 percent, but the two would split the governance evenly.

The transaction is worth $135 million, and LHP’s investment will allow the hospital to pay off its debt and pension liabilities. LHP has also agreed to invest $75 million in capital expenditures in the hospital over five years.

Hospital leaders said much about the hospital will remain the same, including its management, staff, residency programs, name and status as a Catholic hospital. But the move, which requires regulatory approval, would also change St. Mary’s from a standalone hospital with just over 200 beds to a part of a company with hospitals in Texas, Idaho and, pending regulatory approval, New Jersey. It would also make St. Mary’s the second for-profit hospital in the state.

Hospital leaders said the move will give St. Mary’s access to capital, best practices, purchasing power and economies of scale as part of a health care chain.

Joseph Connolly, chief marketing and government relations officer at St. Mary’s, said the hospital had long known that it needed to find a partner that would provide capital.

“We’ve made a lot of great progress over the years, but not having access to capital to fund our strategic plan has always been a challenge,” he said.

By eliminating its debts, St. Mary’s will be in a strong position compared to other hospitals, LHP President and CEO Dan Moen said during a press conference announcing the plan. The hospital has been generating significant cash flow, he said, which will then be able to go into reinvesting in the facilities and services.

Connolly said he expects to see more affiliations and consolidation between hospitals. Many hospitals are also poorly capitalized, he said, and it’s likely more will be looking to find new sources of capital.

Hostetler noted that hospitals are also facing a proposed state budget that would eliminate state funding that helps cover the cost of caring for uninsured or underinsured patients, and would impose a tax on hospitals. The money collected in the tax would be redistributed to hospitals–doing so allows the state to generate federal matching funds–but some hospitals would receive more and some would receive less than they pay in.

“It’s an unsettling time,” she said. “It’s not over. We’ll continue to see hospitals plan and act according to the needs of their communities.”