Court approves $35M sale of suburban hospital.

The Montgomery County Orphans Court approved Wednesday the sale of Mercy Suburban Hospital to Prime Healthcare Services for $35 million.

The deal moves Prime Healthcare, a privately owned for-profit hospital management company based in Ontario, Calif., one step closer to adding a third hospital in the region. It already owns Roxborough Memorial Hospital in Philadelphia and Lower Bucks Hospital in Bristol Township, Pa.

The transaction required the approval of the Orphans Court, which oversees the transfer of assets of charitable institutions including nonprofit hospitals.

The sale of the Mercy Health System Catholic hospital was first announced in March.

In an Orphans Court filing last month, Mercy officials outlined the reasons for the sale — noting Mercy Suburban in East Norriton, Pa., has incurred “increasingly significant” operating losses in recent years because of a steady decline in admissions and a “deteriorating” payer mix. In its current fiscal year, about 77 percent of the patients discharged from the hospital were insured by government health programs that pay less than private health insurers.

Mercy Suburban lost a total of $49 million in fiscal 2014 and 2013, according to records from the Pennsylvania Healthcare Cost Containment Council.

People on the Move

During a hour-long court hearing on the sale Wednesday afternoon, Kathryn Connelly-Conallen, senior vice president of acute-care operations at Mercy Health System, said Mercy Suburban lost another $15.3 million in fiscal 2015 and has been experiencing financial difficulties for seven years.

The filing also noted Mercy Suburban was in need of a “substantial infusion of capital and operating support to remain competitive in the service area.”

The Einstein Healthcare Network opened a $365 million hospital— Einstein Medical Center Montgomery — in September 2012 just a few miles from Mercy Suburban. Einstein’s new hospital was built as a replacement facility for the landlocked Montgomery Hospital Medical Center, which had joined the Einstein system a year earlier, in neighboring Norristown.

Connelly-Conallen testified during the hearing Mercy considered repositioning the hospital as a different type of care provider, pursuing a partnership, or closing the hospital and selling the real estate before deciding to sell the medical center.

"We wanted to sell to somebody who would continue to uphold our mission of providing health care services to this community," she said.

After deciding to sell Mercy Suburban, Mercy’s financial adviser contacted 10 organizations to explore their interest in the hospital. According to the court documents, five of the organizations were nonprofit acute-care hospital operators, three were for-profit acute-care hospital operators, one was of for-profit behavioral health operator, and one was a post-acute care center operator. The documents did not specify how many, or if any, of the organizations other that Prime Healthcare submitted offers.

Mercy did note Prime Healthcare’s final offer was selected because it was the best one — and was on “the high end of the fair market value” for the hospital as determined by its advisers. The deal also included Mercy Suburban's outpatient care center at the Plymouth Meeting Mall and the East Norriton Physician Services medical practice.

As part of the agreement, Prime Healthcare agreed to maintain Mercy Suburban charity care policies, keep substantially all of the hospital's 676 employees, and invest $30 million in capital improvements at the hospital.

Peter Adamo, who serves as Prime Healthcare's regional CEO for the Philadelphia market, testified the company's plans for Mercy Suburban include converting the 126-bed hospital to all private rooms, modernizing the medical center's appearance, upgrading equipment including the facility's air handling system and installing a electronic medical records system.

Adamo said it was too early to determine what clinical service changes Prime Healthcare could make after it takes over ownership of the hospital.

"I can assure you whatever services are provided now will continue," he said. "I would think after the dust settles we may be able to add things that are not present today."

Mercy does not expect a windfall from the sale.

Court records show the deal will only net the Conshohocken, Pa., health system about $300,000 after loans are repaid and legal and consulting expenses are deducted from the purchase price. Mercy incurred about $1.5 million in costs attributed to the sale of the hospital — including $750,000 on investment bankers and advisers and $507,000 in legal fees. Of the $33.5 million remaining, almost all of that will be used to pay off $32 million in bond debt. Another $1.2 million will be used for a loan connected to its East Norriton Physicians Services group.

The remaining $300,000, Mercy said in the filing, will likely go to accounts payable due at closing and for severance payments, if needed.

Mercy Health System, part of Trinity Health, is also the parent company for Mercy Philadelphia Hospital in West Philadelphia, Nazareth Hospital in Northeast Philadelphia, Mercy Fitzgerald Hospital in Darby, Pa., and Mercy Home Health.

Source: Philadelphia Business Journal