CHI's Acquisition of St. Luke's Episcopal Health Detailed

Houston's St. Luke's Episcopal Health System says it will "transfer" into Catholic Health Initiatives, giving the sprawling not-for-profit health system a new footprint deep in the heart of Texas.

In exchange, CHI will transfer more than $1 billion to create an Episcopal Health Foundation to serve the area's underserved population. CHI will transfer another $1 billion for future investment in the health system, the two systems announced jointly.

"The relationship with Catholic Health Initiatives ensures the Greater Houston area will retain one of its great healthcare institutions, while best preparing St. Luke's to meet future changes in healthcare," Kevin Lofton, president/CEO of Englewood, CO-based CHI said in prepared remarks.

The name of the combined system will be shortened to St. Luke's Health System. The combined entities include all of St. Luke's: the Texas Medical Center campus, and suburban hospitals in The Woodlands, Sugar Land, Pasadena and The Vintage, the health systems said.

CHI will maintain all physician models and all employees will remain employees of St. Luke's. CHI will continue St. Luke's affiliations with Baylor College of Medicine, Texas Heart Institute, Kelsey-Seybold Clinic, Texas Children's Hospital and MD Anderson Cancer Center, the health systems said.

The deal is expected to be completed this summer after regulatory approvals.

"It looks like St. Luke's is undergoing a religious conversion," healthcare economist Adam Powell said in an email exchange with HealthLeaders Media. "Money resulting from the sale of the health system will be used to both create a fund to meet the needs of the underserved and to improve the health system's facilities."

The St. Luke's Episcopal Health System Board needed 11 months to cull through 30 prospective partners. The list was narrowed to three finalists last month and the board approved the CHI deal last week, citing the two systems' cultural compatibility, CHI's commitment to continuum of care, and its avowed respect for "the people who made St. Luke's what it is today," the systems said.

"Given the margin pressures being felt in healthcare and the age St. Luke's facilities, this transaction provides a needed injection of capital," Powell says. "Catholic Health Initiatives has historically lacked a Texas presence, and this purchase enables them to enter the market. While alternative purchasers were available, St. Luke's avoided potential anti-trust concerns by picking an outside suitor," says Powell, president of Boston-based consultants Payer+Provider Syndicate.

CHI is the nation's second largest faith-based health system with 78 hospitals and other facilities operating in 17 states. The deal comes weeks after CHI and Vancouver, WA-based Peace Health cancelled merger talks. Tony Kong, director, Healthcare & Life Sciences at consultants West Monroe Partners LLC, says CHI has been actively looking to grow and expand its portfolio of faith-based hospital systems.

"Since they were not able to reach agreement with Peace Health, this acquisition is not a big surprise," Kong said in an email exchange. "The cultural values fit and the opportunity to expand into Houston makes this deal very attractive for CHI and St Luke's."

"I like the fact that CHI is funding $1 billion to create a new Episcopal Health Foundation that will be focusing on providing care and health education needs of the underserved population," Kong says. "This demonstrates a fit of common values and the commitment of another $1 billion demonstrates CHI's commitment to support St Luke's growth and quality patient care."

"It will be interesting to see if they will receive regulatory approval for this transaction. Since CHI is already the second-largest non-profit hospital system in the US regulators are taking a closer look to make sure there's still fair competition and competitive pricing if they approve the merger."

The Right Reverend C. Andrew Doyle, Bishop of the Episcopal Diocese of Texas, said in prepared remarks that while the deal means that the Episcopal Diocese of Texas will no longer provide acute care, "this new foundation will address a widening gap in healthcare throughout our 57-county area. There is a care vacuum that must be addressed, including access to healthcare, prevention, community and environmental health, poverty, education and health disparities."