Delaware’s biggest health system moves into Pa. to buy Crozer Health
The preliminary deal represents a big risk for ChristianaCare, which is cash rich but would face a lot of competition in Delaware County. It's also possible that the deal could fall apart.
ChristianaCare has reached a preliminary agreement to acquire financially troubled Crozer Health, a deal that would bring Delaware’s largest health system into Southeastern Pennsylvania’s highly competitive market.
ChristianaCare and Crozer’s owner, Prospect Medical Holdings Inc., announced their tentative agreement Friday, about four months after Prospect, a for-profit based in Los Angeles, hired Morgan Stanley to sell Crozer and other East Coast hospitals. Terms were not disclosed.
ChristianaCare has huge financial resources and lot of cash in the bank, but its acquisition of Crozer could be a risky move, some health-care experts said.
“Do you really want to get into Penn and Jefferson’s backyard and compete with them?” said Joshua Nemzoff, chief executive of StoneBridge Healthcare LLC, a Bucks County firm that acquires financially distressed hospitals but is not involved in this deal.
It’s possible that the letter of intent, which begins a period of intensive negotiation and examination of Crozer’s finances and its operations, will not lead to a sale. A definitive agreement is expected by June. If that happens, the sale could close by the end of this year, ChristianaCare and Prospect said.
If the sale is completed, Crozer would return to nonprofit status.
Crozer has four hospitals: Crozer-Chester Medical Center in Upland, Delaware County Memorial Hospital in Drexel Hill, Springfield Hospital in Springfield, and Taylor Hospital in Ridley Park. It is among Delaware County’s largest employers, with 4,000 employees.
But those hospitals are not what drives ChristianaCare’s interest in acquiring Crozer, said Janice E. Nevin, ChristianaCare’s president and CEO.
“The opportunity here is that Crozer Health has a robust [outpatient] network. We share a goal of keeping people healthy and keeping them healthy close to home and that’s what makes exploring this relationship worthwhile and what I believe will have the most impact in terms of health,” Nevin said.
ChristianaCare is a nonprofit. If it ultimately buys the Delaware County system, the deal could end a period of turmoil and cutbacks at Crozer, which Prospect acquired in 2016 after no local nonprofit systems were willing to take it on.
Prospect laid off about 100 employees last week, including the executive suite, with the exception of the chief nursing officer. Last month, Prospect closed the maternity ward at Delaware County Memorial and suspended all inpatient services at Springfield. It is closing the 10-bed hospice unit at Taylor Hospital Friday, according to news reports.
Big move for ChristianaCare
The acquisition would represent a significant expansion for Newark-based ChristianaCare from three to seven hospitals if it continued operating all of the Crozer facilities.
ChristianaCare’s three hospitals are: Christiana Hospital, a 906-bed, 1.3 million-square-foot hospital in Newark; Wilmington Hospital, a 321-bed, 622,100-square-foot facility in Wilmington; and Union Hospital, a 72-bed acute care facility in Elkton, Md. The system employs more than 13,000.
Nevin, the system’s CEO, is a physician who started at ChristianaCare in 2002 as chair of the Department of Family and Community Medicine. A graduate of what is now the Sidney Kimmel Medical College at Thomas Jefferson University, Nevin has been CEO since 2015.
In the year ending June 30, 2021, ChristianaCare had $2.6 billion in revenue and $185 million in operating income. Those results included $105 million in federal COVID-19 aid.
In terms of revenue, ChristianaCare is slightly bigger than Temple University Health System, which had $2.4 billion in revenue in 2021. Jefferson and Penn are significantly bigger.
The health system’s financial strength lies in its unrestricted cash reserves, which ratings agency Standard & Poor’s last May called “exceptionally strong,” at $2.6 billion, or more than five times its long-term debt. S&P’s credit rating for Christiana is “AA+.”
That’s the highest rating S&P had on a health system at the end of last year. Only seven other health systems nationally were rated that highly. That compares to a “AA” for the University of Pennsylvania Health System and “A” for Jefferson.
County and union officials welcomed the news that ChristianaCare might buy Crozer. The Pennsylvania Association of Staff Nurses and Allied Professionals, which represents 1,200 nurses and others at Crozer said a sale to ChristianaCare would be “a strong and welcome first step toward returning the system to its core mission of caring for the patients of Delaware County.”
Taking on risk
Some experts consider the purchase a significant risk for ChristianaCare, despite its financial strength.
“They are in exactly the same situation Reading Hospital was in five years ago,” said Nemzoff, referring to the nonprofit that renamed itself Tower Health and spent $423 million on five small, financially struggling hospitals in Southeastern Pennsylvania.
Before that acquisition, Tower had enough cash on hand to continue operating for close to a year without new revenue. It has since closed two of the hospitals and is down to little more than two months’ worth of cash on hand after losing hundreds of millions of dollars, mostly during the pandemic.
A significant difference between Crozer and the hospitals Tower bought is that Crozer’s facilities are in one county. Tower bought hospitals scattered across three counties and hoped to draw them to Reading Hospital in Berks County for the most complex and lucrative care.
Even if ChristianaCare has a different strategy from Tower’s -- one that does not require pushing patients to its anchor hospital in Newark -- the Crozer hospitals are challenging, said Dan Grauman, chief executive of Veralon, a Philadelphia health-care consulting firm. Grauman grew up in Ridley Township.
Given Delaware County’s aging residents and its poor population in Chester, Crozer is heavily slanted toward government insurers Medicare and Medicaid, which don’t pay as well as private insurance, he said.
“If they can pick it up at a low price, not have a lot of debt associated with it, and they can come in and really rationalize it and operate it efficiently, maybe there’s a path. It’s a narrow path,” Grauman said.
He is rooting for that to happen. “This would be really good for the patients. They’re the ones that get hurt in this when you have an owner that is really just trying to cut costs,” he said.
Real estate hurdle
The acquisition announcement said that ChristianaCare would acquire the real estate Crozer occupies, but that’s not a simple matter because Prospect no longer owns the real estate.
Prospect and its former private-equity owner, Leonard Green and partners, in 2019 sold the real estate occupied by the four Crozer hospitals to Medical Properties Trust, a real estate investment firm, as part of a $1.55 billion sale-leaseback deal.
The money from that sale was used to repay debt taken on to pay, among other things, a $457 million dividend to Leonard Green and that firm’s investors, according to Eileen O’Grady, research and campaign manager at the Private Equity Stakeholder Project, a nonprofit advocacy group.
The real estate sale also required Prospect to pay $70 million into the Crozer pension fund, which Prospect froze in 2016 when it acquired Crozer.
Experts said it’s unlikely that ChristianaCare would assume Crozer’s leases and the estimated $30 million to $35 million they cost annually.
Asked if ChristianaCare would own the Crozer real estate, Nevin said: ““We have just signed a nonbinding letter of agreement, and we’re now in a period of exclusive due diligence and all of those details will be worked out as we learn more.”