Iowa-based UnityPoint Health and New Mexico-based Presbyterian Healthcare Services are exploring a merger that would create a system with $10 billion in revenues.
The two signed a letter of intent to consider merging last week. Both systems will now pursue a deeper evaluation that could lead to a definitive agreement and regulatory approvals. Each would preserve their individual brands with a new organization functioning as the parent company with the aim of cutting administrative costs.
“By lowering administrative costs, building new capabilities and increasing investments in innovation and clinical excellence, our intent is to help improve affordability and accessibility of care,” Clay Holderman, president and chief executive officer at UnityPoint Health, said in a statement.
Des Moines-based UnityPoint Health has 20 hospitals in Iowa, Illinois and Wisconsin. Its flagship hospital, Iowa Methodist Medical Center, is in Des Moines, and overall the system generated $4.8 billion in revenues in 2021.
PHS is headquartered in Albuquerque and had more than $5 billion in revenues in 2021. PHS is the largest health system in the state of New Mexico with nine hospitals.
“The execution of a definitive agreement and creation of the new healthcare organization by Presbyterian and UPH are subject to, among other things, satisfactory completion of each party’s due diligence review and necessary approvals,” the systems wrote in a March 2nd notice posted on the Municipal Securities Rulemaking Board’s EMMA website. “There can be no assurance that a definitive agreement will be reached between the parties or that the proposed new healthcare organization will be formed.”
The two did not disclose what intentions they have for their debt if they proceed with a merger.
UnityPoint Health in 2019 explored merging with Sanford Health but it was called off. Sanford is now seeking to merge with Fairview Health Services.
Moody’s Investors Service in December revised its outlook on UnityPoint’s A1 rating to negative from stable. The system has about $1.3 billion of debt outstanding.
“The rating acknowledges that management is actively pursuing mitigation strategies to ease the operating pressures that have caused recent margin declines, which stem from labor shortages, wage and inflation pressures, and management’s ongoing transition of the system’s operating model to create efficiencies,” Moody’s said. “The revision of the outlook to negative reflects Moody’s view that UnityPoint will face challenges in returning to historical operating cash flow margins in light of headwinds including higher labor expenses and inflationary pressures.”
“Inability to demonstrate incremental margin recovery annually or execute strategies to avoid a covenant breach at FYE 2022 will pressure the rating,” Moody’s said.
Fitch Ratings rates UnityPoint AA-minus and stable. UnityPoint Health, formerly known as Iowa Health System, in 2018 established a joint operating agreement with University of Wisconsin Hospitals and Clinics Authority.
S&P Global Services last April revised the outlook to negative from stable on Presbyterian’s AA rating. “The outlook revision reflects our view that PHS faces a likely more challenging 2022 at the same time that operating results for the system have been light relative to the rating during and before COVID,” said S&P credit analyst Suzie Desai.
Moody’s rates Presbyterian Aa3 and stable. Fitch rates the system AA and stable. It has about $350 million of rated debt, according to Fitch.
Hospitals continue turn to consolidation to deal with sector strains although at lower levels than before the pandemic. Merger activity among not-for-profit and for-profit hospitals dipped for a fifth consecutive year in 2022, with mega-mergers in the forefront of a sector dealing with operating challenges from inflation, a nursing shortage, and patient volume trends that tanked margins after a stronger 2021 recovery from COVID-19 pandemic hits in 2020.
Rating agencies are watching for the impact of consolidation on balance sheets and long-term strategies. S&P has moved its outlook to negative on the sector. Fitch left a deteriorating outlook on the sector. Moody’s in December said its outlook remains negative.