Pushing forward with its plans to expand out of state, Steward Health Care System LLC, which has amassed a chain of 10 community hospitals in Massachusetts, signed a letter of intent to buy financially struggling Mercy Health System of Maine from a Catholic hospital group.
The letter, which does not spell out financial terms, gives Boston-based Steward exclusive rights to negotiate with Mercy’s owner, Catholic Hospital East, a Pennsylvania-based network of 35 hospitals and other health care facilities operating in 11 states from Maine to Florida.
If the talks succeed, the parties would reach an asset purchase agreement converting 140-bed Mercy from a nonprofit to investor-owned. The deal would be subject to approval by Maine regulators as well as Vatican officials, who signed off on Steward’s 2010 acquisition of a half-dozen Caritas Christi Health Care Catholic hospitals in Massachusetts.
For-profit Steward, owned by private equity firm Cerberus Capital Management, said it plans to make a “significant investment’’ in the 94-year-old Mercy system, which has 1,700 employees and a medical staff of 800 employed and affiliated doctors, and generates about $200 million in annual revenue. The organization includes two Portland hospital campuses as well as a center focusing on addiction medicine and 11 primary and urgent care sites in and around Portland.
Mercy’s facilities, like Steward’s in Massachusetts, are community hospitals. Patients needing the most complex procedures are referred to Portland’s larger Maine Medical Center.
Mark Rich, Steward’s executive vice president of corporate strategy and management, said he hoped to finalize an asset purchase agreement with Mercy by the end of the year.
“We’re excited about the greater Portland, Maine, marketplace,’’ Rich said. “We think there’s an opportunity for us to do what we did in Massachusetts — develop an integrated health system that keeps care in the community and moves the cost curve in the right direction.’’
Rich said Mercy shares Steward’s clinical mission and values. In a statement disclosing the letter of intent, the parties said Mercy plans to remain a Catholic institution and continue the mission of the Sisters of Mercy, the religious community that founded it.
Toward that end, the parties would sign an agreement committing Steward to maintaining the Catholic church’s ethical and religious health care directives, including a prohibition on abortions. A similar pact was signed with Catholic authorities in Massachusetts when Steward acquired the six Caritas hospitals.
Mercy, which has been losing money for several years, operates far from the mid-Atlantic states where the largest cluster of Catholic Hospital East facilities are located. The decision to part company was “amicable,’’ a recognition that Mercy needed a stronger partner to help it consolidate medical services at its Fore River campus, overlooking Casco Bay, said Eileen F. Skinner, president and chief executive of Mercy Health System.
Skinner said there will be other advantages to an alliance with Steward. “We were seeking a partner that could give us back-office scale, and scale and geography around accountable care,’’ she said. She said Steward could help not only with its information technology and electronic medical record systems, but also by helping Mercy negotiate better contracts with Medicare and commercial health plans and helping it manage health care in a more coordinated way.
Under its current fee-for-service contracts, Skinner said, Mercy is penalized for its focus on quality and preventive care that seeks to avoid unnecessary procedures and keep patients out of emergency rooms. Steward, by contrast, has experience with global payment systems in Massachusetts. Under the set-up, insurers give it an annual fixed budget to provide for the care of patients. “If we can’t get paid differently [by insurers], our model is not sustainable,’’ she said.
Mercy talked to more than a dozen potential partners before deciding to negotiate with Steward, according to Skinner, who said the proposed affiliation was well received by employees.
The letter of intent to acquire Mercy is Steward’s second agreement with an out-of-state hospital. Steward has concluded an asset purchase pact with 214-bed Landmark Medical Center in Woonsocket, R.I., but several conditions remain to be negotiated before the deal takes effect.
“It’s essentially a regional strategy,’’ said Steven J. Tringale, managing director of Hinckley Allen & Tringale, a Boston health care consulting firm. “Mercy is a hospital that’s maintained its loyal following. It gives Steward a base of operations in Maine. A lot of people believe health care is going to become regionalized, so this is a transaction that supports the Steward strategy. I suspect you’ll see them looking at other hospitals in that seacoast beltway between southern Maine and northern Massachusetts where they have significant penetration.’’
Rich said it is too soon to determine whether Steward will seek additional hospitals in the region, noting that Mercy is large enough to operate independently in Maine while deploying Steward’s back-office technology. Among other things, he said, Steward might be able to use its so-called tele-ICU technology to give Mercy intensive care unit doctors a second set of eyes. The system would allow Steward doctors to remotely monitor procedures at Mercy from Massachusetts.
“We’ll bring tools for clinical integration,’’ he said.