PORTLAND, Maine — As Steward Health Care System moves ahead with its planned purchase of Mercy Health System of Maine, most of the Massachusetts company’s hospitals are losing money.
That’s not surprising, given Steward’s strategy for Mercy and the other hospitals it has scooped up since forming in 2010. The for-profit company invests millions of dollars in financially struggling facilities, shoring up buildings and infrastructure and giving hospitals the resources to change how they’re paid for taking care of patients.
Mercy has never faced bankruptcy, but it has lost money for the last three years. Its revenues totaled $190 million in 2010, a drop from $196 million in 2009, according to its most recent tax filing.
Mercy has signed a letter of intent to sell the system to Boston-based Steward. If the sale goes through, Mercy would become the first hospital in Maine to be owned by a for-profit company.
A member of Pennsylvania-based Catholic Health East, which operates 35 acute care hospitals across the eastern seaboard, Mercy includes two flagship hospitals in Portland and several health care facilities in southern Maine.
In Massachusetts, all but two of Steward’s 10 hospitals are in the red, according to a November report by the Massachusetts Center for Health Information and Analysis, an independent state agency tasked with tracking medical spending. In the second quarter of fiscal year 2012, Steward’s Norwood Hospital in Norwood posted losses of more than $7 million and its Carney Hospital in Dorchester showed losses of $6.5 million, according to the report.
Mercy officials declined to comment, citing a confidentiality agreement that’s in place during the due diligence phase of the deal.
In a brief statement, Steward spokesman Christopher Murphy said the report touched on only a piece of the company’s overall business.
“Steward Health Care is an integrated community care organization with a large base of non-hospital operations and revenue, not a hospital company,” he said. “These results provide limited information about a small portion of our business during a time of significant investment and growth in our system.”
As the product of a Wall Street buyout firm, Steward has financial resources far eclipsing those of nonprofit hospitals. The company formed two years ago when Massachusetts’ Caritas Christi Health Care system was bought out by Cerberus Capital Management, a private equity firm.
Steward has also acquired physician groups, built a statewide provider network, and partnered with Tufts Health Plan to market less expensive insurance to small employers that restricts patients to Steward providers for routine ailments.
“They do have a lot of money; it’s not like they’re going to go broke,” Stuart Altman, a health care economist at Brandeis University in Waltham, Mass., said of Steward.
The company’s hospitals aren’t alone in recording losses. An earlier state report found that more than a third of Massachusetts hospitals — facing ever-shrinking government payments and growing pressure to lower prices — lost money last year.
Private insurers also pay hospitals different rates for essentially the same services, Altman said.
“The way we pay hospitals in Massachusetts is that some are just poorly paid relative to what they do. It’s not the hospitals’ fault as much as it’s the system,” he said.
It’s too early to assess whether Steward will be able to return the struggling hospitals it has acquired to profitability, Altman said.
“They bought hospitals that were losing money to begin with. It’s not like they run them into the ground,” he said. “They may be overly optimistic, but I think that they feel they can turn these things around.”
Steward’s St. Anne’s Hospital in Fall River, Mass., is operating at a healthy margin of nearly 10 percent, according to the report.
The planned buyout will likely give Mercy access to capital that could help the system to invest in bricks-and-mortar improvements and electronic health records, said Andy Coburn, a rural health expert and chair of the Master of Public Health program at the Muskie School of Public Service at the University of Southern Maine.
In its letter of intent, Steward said some of its investment would fund consolidation of Mercy’s two campuses in Portland, located on State Street and Fore River Parkway.
It remains to be seen how the sale could affect health care costs, Coburn said. Better competition between Mercy and Portland’s other major hospital could result in savings, or raise costs by duplicating services in the city, he said.
“Steward brings money; Steward potentially brings a strategy for making Mercy, at least with regards to some services, competitive with Maine Medical Center,” he said.
Steward uses a system that pays hospitals and doctors a set amount of money annually to cover each patient’s care, rather than reimbursing them for each visit or procedure. It also subscribes to a model known as accountable care, where health care providers are rewarded financially for better coordinating care so that patients are healthier and happier with their treatment.
Many wonder whether Steward, as a private for-profit company, will continue with Mercy’s charitable mission and a similar local accountability structure, Coburn said.
“We may have to have some changes in policy and law to be able to assure that we have some transparency in terms of financial operation,” he said.
Steward pledged in the letter of intent to maintain Mercy’s level of charity care, or free care provided to people who can’t afford their medical bills, and a local governing board.
Altman speculates that the Mercy deal is about more than a single acquisition for Steward. The company may be looking to move aggressively into Maine or to funnel patients to its hospitals in Massachusetts, he said.
Mercy said in August that the planned sale was expected to take about six months. A Catholic organization, Mercy must win approval from the Vatican and state and federal regulators.
Terms of the deal have not been disclosed.