The News Sentinel reports today that "Mercy Health Partners, which comprises seven East Tennessee hospitals, will now be managed by Health Management Associates, ending its Catholic affiliation and nonprofit status."

According to the article, "An agreement between the two organizations is expected to be completed by the fall." The article also quotes the CEO of Health Management Associates (HMA) as saying "the company looked forward to negotiating a binding agreement."

Contrary to reports in the paper and announcements to Mercy employees and associates, it appears there are several hurdles to be cleared before it's a done deal.

According to their latest annual report, HMA "operates general acute care hospitals and other health care facilities in non-urban communities." They have 59 hospitals with 8,864 beds in Alabama, Arkansas, Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Washington and West Virginia.

Their strategic business plan is "to acquire underperforming non-urban general acute care hospitals that are available at a reasonable price, align with our business model and otherwise meet our strict acquisition criteria." Part of that criteria is acquisition of hospitals that are or can become "the sole or preferred provider of health care services in their respective markets."

Their target markets have "a history of being medically underserved," have a "growing elderly population," exhibit "patient outmigration trends to urban medical centers," and are in states where a certificate of need is required to build new hospitals or add beds, creating "appropriate barriers to prevent others" from building hospitals or adding beds which permits them to be "the sole or preferred service provider within a geographic area."

Mercy Health Partners has 370 beds at St. Mary's, 101 beds at Mercy Medical Center West, 108 at Mercy Medical Center North, 58 beds at St. Mary's Jefferson Memorial, 60 beds at Baptist of Cocke Co., 66 beds at Saint Mary's Campbell Co., 35 at Saint Mary's Scott Co., and zero beds at Mercy Riverside, formerly Baptist in South Knoxville.

HMA had 2010 revenues of $5.1 billion and net income of $150 million. They have approx. 36,000 employees. HMA has long term debt of approx. $3 billion plus $3.25 billion in senior secured notes.

According to the most recent annual report by parent company Catholic Health Partners, Mercy Health Partners of Tennessee had a loss of $14 million on revenues of $616 million in 2010. Their long term debt is approx. $345 million, approx. $135 million of which appears related to the recently acquired and now shuttered Baptist Hospital in South Knoxville. Mercy has approx. 2700 employees.

Given the timing of the announcement, the deal is presumably far enough along that HMA has looked at the books and is comfortable going forward, at least with an announcement.

At the time of their most recent annual report, however, HMA was involved in a lawsuit filed by a Georgia hospital after HMA terminated non-binding negotiations to acquire the hospital. The hospital claims breach of the purchase agreement and violation of a confidentiality agreement. (HMA says the lawsuit has no merit.) So it is not unknown for them to pull out of a deal.

In looking at the company's acquisition strategy and target markets, Knoxville's Mercy operations do not appear to be a good fit. While Mercy as a whole certainly appears to fit the "underperforming" criteria, it remains to be seen whether it is "available for a reasonable price." And Knoxville doesn't appear to be "underserved," at least as long as Mercy is still operating.

Further, St. Mary's of Knoxville does not appear to meet their criteria of a "non-urban" hospital. With 370 beds (580 total at three Knoxville locations), it would be HMA's fourth largest hospital, and not likely to become the "sole or preferred" hospital in the area. Their average hospital size is 150 beds. Perhaps they are more interested in the Jefferson Co., Cocke Co., Campbell Co., and Scott Co. operations, which seem to be a better fit.

Another complication might be HMA's $3.25 billion in senior secured notes. According to their annual report, these notes contain "covenants and restrictions that, among other things, require us to maintain compliance with certain financial ratios." Noncompliance could result in default or subject the company to higher interest and financing costs and adversely affect their credit ratings. Presumably they have already looked at whether taking on Mercy's "large debt load" (as characterized by the KNS) would affect their debt ratios in this regard.

The deal will also be subject to review and approval by state regulators. According to state law, the sale or conversion of a non-profit to a for-profit corporation requires notification to the state Attorney General, who has the regulatory authority to investigate the deal and any community concerns to determine if it is in the public interest.

HMA has apparently cleared this hurdle at least three times in Tennessee with currently operating hospitals in Jamestown, Lebanon, and Tullahoma. Apparently, in these cases the AG did not have any concerns with regard to HMA's publicly stated strategy of being the "sole or preferred" provider in a geographic area (i.e. "monopoly"), especially in states where certificates of need (like Tennessee) create "appropriate barriers to prevent others" from competing.

All of this is not to say this is a bad deal for Mercy or East Tennessee. HMA sounds like a mostly respectable company that has had success in turning around underperforming hospitals. It's always a little curious, though, how the local media reports such press releases as done deals without any questioning. Perhaps they will start looking a little closer at these and other questions as the negotiations progress, in the public interest and whatnot.