Byline: KRISTEN SCHORSCH
Two suburban Chicago hospital powerhouses, Advocate Health Care Network and Cadence Health System, are going head to head in the final round to take home Elgin's Sherman Health Systems.
Advocate, a statewide 12-hospital network based in Oak Brook, and Cadence, a two-hospital system based in Winfield, were selected by northwest suburban Sherman from a list of five potential bidders, says Mary Martini, Sherman's vice president for business development. A deal could range from an outright acquisition to a joint venture to shared services.
Sherman would give Advocate, which already has a hospital about 15 miles northeast of Sherman in Barrington, an even larger footprint in the northwest suburbs. For Cadence, it would be a chance to break into new territory.
Sherman CEO Rick Floyd has been courting suitors for at least a year.
Mr. Floyd's health care system faces a rapidly changing future. The CEO more than doubled Sherman's debt to nearly $300 million to open a gleaming 255-bed hospital in 2009 that became the premier facility in a fast-growing region. Since then, though, the industry's consolidation wave and cost pressures have intensified, making independent hospitals think twice about whether they can go it alone. And the recession slammed the brakes on population growth.
The 124-year-old hospital also is facing tough competition from Provena St. Joseph Hospital in Elgin and St. Alexius Medical Center in Hoffman Estates, both part of large systems.
With Sherman's financial picture improving--revenue is rising while its losses are shrinking--now might be the best time to attract a buyer.
'Making a decision when the hospital is doing better is probably a good idea, especially if they foresee that as a stand-alone organization, eventually time is going to catch up to them and they won't be doing as well financially,' says Doug Fenstermaker, a Chicago-based vice president of health care at Warbird Consulting Partners.
Mr. Floyd says he wants to team up with a system that can better manage costs, such as by treating more people as outpatients and preventing readmissions. 'The community we service is going to be better off if Sherman is part of something larger,' he says, adding that he'd like Sherman to remain secular.
By one measure of financial strength, Cadence has the better shot at buying Sherman, according to Principle Valuation LLC, a Chicago-based firm. Cadence, formed by the 2011 merger of Central DuPage Hospital and Delnor Health System, had $769.7 million in total operating revenue and $68.5 million in operating income for the nine months ended March 31, the most recent data available.
But Advocate, which is affiliated with the United Church of Christ and the Evangelical Lutheran Church of America, is bigger, with $4.4 billion in total operating revenue and $300.8 million in operating income for the year ended Dec. 31, 2011.
Each system has submitted multiple proposals for Sherman, Ms. Martini says, declining to provide specifics. Sherman expects to name the winner this fall.
Sherman, which includes a nursing home and smaller affiliates, is a good catch. The hospital boasts private rooms, a geo-thermal lake and a site close to Interstate 90. Net operating revenue has increased 25 percent, to $307.7 million, for the fiscal year ended April 30, since the hospital debuted in December 2009. It lost $1.9 million in fiscal 2012, but that's far smaller than its year-earlier loss of $8.0 million. Admissions have increased about 30 percent.
In selecting Advocate and Cadence, Sherman eliminated three other bidders: national Catholic hospital chain Ascension Health, a St. Louis-based network that acquired Arlington Heights-based Alexian Brothers Health System in January; Rush University Medical Center, an academic medical center on Chicago's Near West Side; and Trinity Health, a national Catholic hospital network based in Novi, Mich., that acquired Maywood-based Loyola University Health System in July 2011 and Mercy Hospital & Medical Center on the Near South Side in April.
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