Lebanon — Hospital and clinic operator Dartmouth-Hitchcock has begun confidential discussions about an affiliation deal with Elliot Health System, a smaller provider with a flagship hospital in Manchester that has been reported to need a $350 million makeover.
Elliot’s board “voted unanimously in favor of exploring an affiliation” with D-H, according to a news release issued Friday.
The chance to forge a tie with D-H represented “an exceptional opportunity that will enable Elliot to address some of the most critical issues facing our state ... including inadequate inpatient facilities to offer all patients private rooms and the appropriate privacy, the mental health and drug addiction crisis, overcrowded emergency departments and the need for expanded access to primary and specialty care,” Greg Baxter, Elliot’s chief medical officer, said in a prepared statement.
Stephen LeBlanc, D-H’s executive vice president for enterprise strategy design, confirmed that talks were underway, but declined to speculate on what form an affiliation might take. In previous deals, D-H has become the “sole corporate member” of its affiliates, with a final say over their finances, strategy, governing board composition and top management.
But LeBlanc said that wouldn’t necessarily provide a template for this deal. Compared with previous negotiating partners, he said, “Elliot is a much larger organization with a lot of capabilities.”
LeBlanc also said that the reported estimate of $350 million in renovation needs to the 296-bed Elliot Hospital in Manchester would be “subject to discussions.” He noted that infrastructure changes are needed by many health care providers.
“All organizations are looking at that,” he said. “You have to decide what you want to do first.”
Baxter said that Elliot’s “campus modernization project” would be a key element of the negotiations with D-H.
An affiliation deal could add nearly 300 beds and a visiting nurse operation to D-H’s network, which serves New Hampshire and Vermont. The galaxy of nonprofit health care providers already in the D-H network includes hospitals with a total of nearly 500 beds and clinics that employ about 1,000 physicians. An affiliation deal with the Visiting Nurse and Hospice for New Hampshire and Vermont is still being finalized, LeBlanc said.
The D-H network is the product of a multi-year wave of affiliations with smaller hospitals that began after a 2010 challenge by New Hampshire regulators that prompted D-H to walk away from a proposed affiliation with the 330-bed Catholic Medical Center in Manchester.
“The goal isn’t to get bigger,” LeBlanc said of D-H’s urge to affiliate. Instead, the deals are done in pursuit of “the ideal of a sustainable health care system for our communities,” he said. “We need to find out how to get more efficient.”
In an interview last week, D-H Chief Executive James Weinstein sounded the same theme. “The reason to have all these affiliations is to use those beds in Mt. Ascutney (Hospital and Health System) or New London (Hospital) or even” Alice Peck Day Memorial Hospital in Lebanon, he said. Those beds can be used to provide care to patients who “don’t need to be here but can be closer to their home,” he added.
Beds in affiliated hospitals can be part of a network with a reach that is extended by the use of remote video and monitoring, he said.
That approach has already made D-H a relatively low-cost provider of acute care, he said: “We take care of sicker patients cheaper.”
Elliot’s current overture emerged from a “robust strategic planning process” by its board of directors over the past year, according to a news release issued Friday. In November, Juniper Advisory, a Chicago firm that describes itself as “an independent, privately held investment banking firm dedicated to providing hospitals and health systems with expert merger and acquisition and other strategic affiliation advice,” announced that it had been hired to help Elliot explore its options.
Things got busy last week. On Thursday, Elliot announced that Chief Executive Jim Woodward planned to leave in July to take the top job at a Pennsylvania hospital. As it seeks a replacement for Woodward, who took the helm at Elliot in August 2014, the board will “continue to explore potential partnership options,” the release said.
That exploration quickly showed results. On Friday, Elliot announced that it and D-H had entered “a period of confidential negotiations and due diligence to arrive at a definitive agreement” and promised more information this week.
LeBlanc declined to speculate as to what additional information would be available, but he put the new talks in context.
“We have discussions with lots of folks,” he said. “We’ve had discussions with Elliot in the past.”
Those contacts continued even as Elliot talked with other potential partners, LeBlanc said. “There wasn’t a point where we stopped talking.”
Both health systems have endured narrow financial margins in recent times.
In the fiscal year that ended June 30, Elliot posted income from operations of $16.3 million and revenue of $509.7 million, while D-H lost $9.3 million from operations while posting revenue of $1.6 billion.
In the quarter that ended March 31, Elliot posted income from operations of $11.7 million on revenue of $105 million, while D-H netted $6.1 million on revenue of $378.7 million.
But D-H has stronger credit. D-H, which had $575 million in long-term debt outstanding at the end of fiscal 2015, has an “A” credit rating from Standard and Poor’s, while Elliot, with $146 million in long-term debt, had a BBB rating.
An “A” rating denotes a borrower with a “strong capacity to meet its financial commitments (that) is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.” A “BBB” rating denotes a borrower with “adequate capacity to meet its financial commitments (but where) adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity ... meet its financial commitments.”
Rick Jurgens can be reached at rjurgens@vnews.com or 603-727-3229.