This article has been updated with additional interviews and reporting.
Capping two years of closed-door talks and negotiation, Oregon Health & Science University and the Portland-based Legacy Health hospital chain announced they have signed an agreement for non-profit Legacy to become a subsidiary of OHSU.
Under the deal, financial powerhouse OHSU — a state public agency — would use its bonding capacity to raise $1 billion over 10 years to upgrade Legacy’s footprint of six hospitals, five in Oregon and one in Washington. Legacy, financially wobbly, would likely have trouble undertaking that scope of work on its own.
If approved by regulators after a public comment period and possible hearings, the expanded entity would be the largest health system in the greater Portland area, overshadowing Kaiser Permanente and Providence Health, and would be a dominant player in the Northwest. That’s the aim of OHSU and Legacy leaders.
Many particulars, including exact timelines and detailed financial projections, are yet to be worked out or released. OHSU and Legacy must submit the deal for review by Oregon’s Health Care Market Oversight program, which evaluates transactions to make sure they won’t reduce health care services or increase cost.
The entities hope for state approval by the spring of 2025, OHSU CEO Danny Jacobs told The Lund Repot. They expect to apply for the market oversight review this summer, he said.
The deal also would need to be approved by the Oregon Attorney General’s Office and possibly by federal antitrust regulators tasked with ensuring a competitive marketplace.
The announcement comes as both entities face financial challenges. Both have been hit by fast-rising costs – especially for nurses, doctors and other personnel – that often outstrip rising payments from commercial and government health care insurance coverage.
However, both entities – and especially OHSU – have big investment portfolios that generate gains that typically offset operating losses.
The proposed merger would let Portland-based OHSU care for more people, including the medically underserved, through the wide network of Legacy hospitals and clinics in Oregon and Southwest Washington, the sides said in a news release.
“There are a lot of headwinds” in the health care sector, including rising costs, Legacy Health Board Chairperson Charles Wilhoite told The Lund Report. Legacy and OHSU “can be better together. That’s our objective,” he said.
The expanded system would increase OHSU’s ability to attract, keep and train world-class health and science professionals, OHSU said in a news release.
OHSU is focused on “expanding access and the footprint of OHSU to all Oregonians, so that we can continue to provide care and do the best we can for all Oregonians,” OHSU Board Chairperson Wayne Monfries told The Lund Report.
Under the deal, Legacy’s roughly 14,000 workers would become state employees, joining OHSU’s workforce of about 16,000.
Most OHSU employees are represented by labor unions. The Oregon Nurses Association holds its labor agreement at OHSU as a model for high pay, working conditions and other terms. Most Legacy employees are not union represented. But becoming a subsidiary of OHSU might spur union drives at some Legacy facilities.
Under the merged structure, the cost of Legacy’s employees might increase, as they would be eligible for perks such as state retirement benefits.
OHSU has done preliminary analysis on how it could afford staff compensation as well as the $1 billion long-term investment in Legacy, Monfries said. OHSU and Legacy are now working on an “integration plan” to iron out specifics, he said.
“We have to come up with that plan. There’s no playbook on how to do this, how to integrate these systems,” he said.
Both systems, but especially Legacy, have encountered financial struggles.
Legacy would have reported an $82 million operating loss for the fiscal year ended March 31, except for the fact that it sold a laboratory business in late 2023, a deal that gave it a $99 million operating gain, according to its latest filing. Meanwhile, OHSU reported a $44 million operating loss in the nine months ended March 31.
Legacy in the previous fiscal year had an operating loss of $172 million. Operating results don’t include returns on Legacy’s $1.3 billion investment portfolio. Gains on that portfolio have been strong, given the stock market’s good performance. As of March 31, the portfolio was up $158 million from a year earlier.
Bond ratings agencies are lukewarm on Legacy’s financial performance, and in late 2023 the Moody’s rating service affirmed Legacy at A1, but downgraded the outlook from “stable” to “negative.”
OHSU, by contrast, is rated by Moody’s at Aa3 “stable,” a notch above Legacy on Moody’s 10-step rating system for so-called “investment grade” bonds.
Under the OHSU-Legacy agreement, OHSU can back out of the deal if the bond rating of the new combined entity drops below A3, which is two notches below Legacy’s current level.
Under the deal, all Legacy’s hospital facilities plus cash and investment assets would transfer to OHSU, except for about $350 million that would go to an independent Legacy foundation for health care initiatives.
Aside from its $1.3 billion investment portfolio, Legacy’s main assets include its buildings, valued for accounting purposes at $840 million. Legacy’s main liability is long-term debt, at $726 million. Its net worth – all assets minus all liabilities – is $2.2 billion.
OHSU, which recently announced the need to eliminate jobs to address losses, retains the ability to terminate the deal if further review shows that Legacy’s liabilities are larger than expected, or if regulatory requirements reduce Legacy’s revenues by certain amounts.
OHSU would have to pay Legacy a termination fee of $25 million if OHSU calls off the deal.
OHSU, despite its struggles with rising costs, is a financial colossus in Oregon’s health care sector. It’s $44 million operating loss on operating revenues of $3.7 billion was a surprising bruise. OHSU, together with its foundation, have investment portfolios totaling $2.9 billion. In the most recent nine months, those portfolios generated gains of $172 million, more than offsetting operating losses. OHSU, including its foundation, has a net worth of $4.3 billion.
A Moody’s analysis in January said OHSU needs to “constrain expense growth, and successfully grow and diversify revenues.”
I fear that OHSU will decide to save money by disappearing or downsizing Randall Children's Hospital, the pediatric hospital at Emanuel. Right now it is competition for OHSU's Doernbecher Children's Hospital. My guess is that within 5 years Randall will be general pediatrics and specialty referrals will go to OHSU. (I would not be surprised if something similar happens with obstetrics, too.)