Business & Tech
    Next Score View the next score

    Steward merger would make it nation’s biggest private for-profit hospital system

    Steward opened an expanded emergency room in Taunton in 2015.
    Jonathan Wiggs/Globe Staff
    Steward opened an expanded emergency room in Taunton in 2015.

    Steward Health Care System, founded almost seven years ago to rescue a group of struggling Massachusetts hospitals, is making its biggest move yet to become a national player in the competitive for-profit hospital industry.

    Steward on Friday announced a nearly $2 billion deal with IASIS Healthcare of Franklin, Tenn., which would make it the largest private for-profit hospital operator in the country. The merger would create a network of 36 hospitals across 10 states, with revenue of nearly $8 billion, Steward said.

    The deal with IASIS follows Steward’s first out-of-state acquisition, completed earlier this month. It bought eight hospitals in Ohio, Pennsylvania, and Florida for $304 million.

    Advertisement

    IASIS runs 18 hospitals in Utah, Arizona, Colorado, Texas, Arkansas, and Louisiana. Terms were not disclosed, but a person familiar with the matter said the sale is for $1.9 billion. The merger, subject to regulatory approvals, is expected to close in the third quarter of 2017.

    Get Talking Points in your inbox:
    An afternoon recap of the day’s most important business news, delivered weekdays.
    Thank you for signing up! Sign up for more newsletters here

    Steward executives said the transaction would allow them to expand the community-based accountable care model they have pushed across Eastern Massachusetts. Locally, Steward’s hospitals include Carney Hospital in Dorchester and St. Elizabeth’s Medical Center in Brighton.

    “We’re a community-based model with a mission of driving the highest quality care we can that is cost-efficient,” said Dr. Mark Girard, president of Steward’s physician network. “We think we can replicate that in the other markets in the country.”

    The company — which competes locally with Partners HealthCare, Beth Israel Deaconess Medical Center, and other health systems — has been building on a system for care under which doctors and hospitals earn more money when they stay under budget and meet several quality scores that measure patient health.

    The deal also gives Steward its first foothold in the insurance business: It includes Health Choice, a managed care plan run by IASIS that covers about 680,000 people.

    Advertisement

    Backed by New York private equity firm Cerberus Capital Management, Steward entered the Massachusetts health care market in 2010 when it bought the financially-distressed Caritas Christi hospitals formerly run by the Archdiocese of Boston. IASIS is backed by TPG Capital, another private equity firm.

    If the deal with IASIS goes through, Steward, headquartered in the Back Bay, will operate more hospitals outside Massachusetts than it does here.

    From Steward’s founding, its chief executive, Dr. Ralph de la Torre, envisioned the company growing beyond Massachusetts, but those plans didn’t start to materialize until recently.

    Last year, Steward sold its hospital buildings to a real estate investment firm, Medical Properties Trust Inc., or MPT, lining up $1.25 billion to help fund a national expansion. Then in February, Steward said it would to buy eight hospitals from Community Health Systems Inc., a large publicly-traded hospital company.

    The newly acquired hospitals will be branded under the Steward name, de la Torre told employees in a memo.

    The merged organization would include nearly 40,000 employees and a network of 5,600 doctors.

    “We have come from a struggling collection of disparate hospitals to become one of the most influential health care operators in the country,” de la Torre wrote in the memo.

    Advertisement

    IASIS chief executive W. Carl Whitmer said “it will be business as usual” as executives work to complete the merger.

    “IASIS’s mission has been to deliver high-quality, cost-effective health care to our patients and the communities we serve,” he said. “Steward’s innovative approach to reducing health care cost and improving quality of service will further this mission.”

    Steward said MPT, the real estate company to which Steward sold its Massachusetts hospital buildings, has also agreed to acquire all of IASIS’s real estate and lease it back to the company.

    Steward lost money for years before posting its first-ever operating profit in 2015, a $131 million gain. The black ink was largely a result of a change in employee pensions, but it followed an operating loss of $75 million in 2014. Steward’s revenue grew about 1 percent during those years, to about $2.2 billion.

    The company’s results for 2016 are still unknown because it has not filed financial statements as required with the state Center for Health Information and Analysis, according to that agency. Steward and CHIA have frequently sparred over financial information that the state says Steward has refused to submit.

    Steward also stirred controversy when it closed Quincy Medical Center in 2014, and when it abruptly shut a family medicine residency program last year at Carney.

    But some health industry analysts said the company has been ahead of others in investing in so-called accountable care.

    The business model relies on payment contracts with insurers that are designed to encourage cost-efficient care, replacing the traditional fee-for-service model, which critics believe promotes unwarranted use of medical services.

    “Steward is essentially betting that it can apply its model of accountable care and cost containment to a hospital system in other geographies,” said David E. Williams, president of the Boston consulting firm Health Business Group.

    “This is a very interesting contrast with some of the mergers and acquisitions undertaken by the other major hospital systems in Massachusetts. While others have focused on bulking up to increase their market power over local health plans — which can drive up costs overall — the Steward/
    IASIS arrangement poses no such concerns,” he said.

    Lawrence W. Vernaglia, a health care lawyer at Foley & Lardner LLP in Boston, said that while cross-state mergers can be complicated, Steward’s expansion plan makes sense.

    “They’re rolling their expertise across the country,” said Vernaglia, who has worked in the past for Steward as well as many other health systems. “I’m excited to see somebody try to do what they’re trying to do on the national level.”

    Steward is among many Massachusetts-based hospital companies that are looking to expand. The state’s largest network of doctors and hospitals, Partners, wants to acquire Care New England Health System of Providence, as well as Massachusetts Eye and Ear, a specialty hospital in Boston. And Beth Israel Deaconess and Lahey Health are leading a merger that would include 11 hospitals, if completed.

    The state Health Policy Commission typically reviews local hospital mergers for their effect on health costs, but it’s unclear whether the commission will review the latest Steward deal, as the impact will be felt in other states more than in Massachusetts.

    Priyanka Dayal McCluskey can be reached at priyanka-.mccluskey@globe.com.
    Follow her on Twitter @priyanka_dayal.