Jefferson plans to acquire Lehigh Valley Health Network, forming a 30-hospital network

Thomas Jefferson University plans to acquire Lehigh Valley Health Network in a deal that would create a system of 30 hospitals from Scranton and Pottsville in Pennsylvania to South Jersey, the two health-care institutions said Tuesday.

The combination of Jefferson and Lehigh would rank among the nation’s 20 largest nonprofit health systems by number of hospitals, with $14 billion in revenue in the last fiscal year. Among Pennsylvania nonprofit health systems, only the Pittsburgh-based UPMC would be bigger on both counts.

The acquisition plan grew out of a meeting about six months ago between CEOs Joseph G. Cacchione of Jefferson and Brian A. Nester of Lehigh about using Lehigh Valley Health as a springboard to expand Jefferson’s health insurance arm, Jefferson Health Plans, into northeastern Pennsylvania.

» READ MORE: A timeline of Jefferson’s acquisitions since 2015

The leaders signed a preliminary agreement Monday and will now work on a definitive deal before seeking approval from their boards. The merger will also require regulatory approval.

The deal is not about saving money through economies of scale, even as the health-care industry struggles with elevated expenses after the pandemic and pressure from the government and private insurers to cut costs, Cacchione and Nester said in a joint interview.

Instead, their proposed mega system reflects their shared conviction that combining patient care and health insurance makes both sides of the business more accountable to the other. They think such accountability within the same organization can lower health-care costs and improve patient care — especially for the most vulnerable populations.

“Our industry is in a tough spot, and we know what the future needs to look like. We want to be proactive and aggressive about getting there,” Nester said. ”In Jefferson, we found a way to do it.”

Jefferson is undertaking the Lehigh acquisition even as it works to recover financially after expanding from three to 18 hospitals in recent years. Jefferson has reported operating losses in three of the last four years.

But its losses have been narrowing, and Jefferson expects to break even by the end of fiscal 2024, said Cacchione, who acknowledged the deal with Lehigh is coming soon after the rapid growth under his predecessor Stephen K. Klasko.

“We see it as being maybe a little sooner than we would have hoped, but we couldn’t be more thrilled at the opportunity for Lehigh and Jefferson to come together,” Cacchione said.

The deal enables Jefferson to reduce its risk from having too many hospitals concentrated in the Philadelphia region, said Joshua Nemzoff, a New Hope-based investment banker specializing in health care. But he questioned how much it would help Lehigh Valley, which he described as a financially strong, well-run system.

“There’s no reason they would give the keys to their health system to somebody else and give up control,” said Nemzoff, chairman of StoneBridge Healthcare LLC, which was formed to acquire financially distressed hospitals.

Cacchione hopes to complete the deal next year. As is typical in deals between nonprofits, no money is expected to change hands.

Between 2015 and 2021, Jefferson acquired five health systems, a university, and a nonprofit health insurer, Health Partners Plans. The string of deals increased its revenue to $9.7 billion in fiscal 2023 from $2.1 billion in 2014.

Since Cacchione became CEO in September 2022, Jefferson has intensified its efforts to create a more unified operation out of its sprawling businesses. He cited Jefferson’s closing of Einstein Medical Center Elkins Park as an acute care facility, which left Jefferson with 17 hospitals in the Philadelphia region.

Jefferson looked for efficiencies by moving inpatient rehabilitation beds out of Jefferson Abington Hospital to Elkins Park, and operating Magee Rehabilitation Hospital and MossRehab as one entity.

“We haven’t declared victory in any way, shape or form, but on the Jefferson side we’re on plan,” Cacchione said.

Despite its losses in the last two years, Jefferson’s financial results have benefited from the sale of businesses and newly formed joint ventures.

The timing isn’t perfect for the Lehigh Valley Health acquisition, Cacchione said, but the opportunity was too good to pass up.

Especially alluring to Jefferson is the expansion of Jefferson Health Plans’ Medicare and Medicaid businesses into the Lehigh Valley.

Jefferson Health Plans is a separate business wholly owned by Thomas Jefferson University. Licensed by the Pennsylvania Insurance Department, it sells private versions of Medicare, the government-funded health coverage for people 65 and older, and Medicaid, which is for lower income individuals and families. For next year, Jefferson Health Plans is selling Affordable Care Act plans for the first time to Pennsylvania residents who qualify for insurance coverage under Obamacare.

By acquiring Lehigh, Cacchione sees potential to better serve people who qualify for both Medicare and Medicaid. Those patients get better health outcomes, with lower costs, when their insurer and doctor work for the same company, he said.

Those using Jefferson insurance can still seek health care outside of Jefferson hospitals, but Cacchione said outcomes improve when Jefferson is the insurer and provides the care. “If we’re at risk for the premium dollar, we are going to be more proactive in making sure those people have access,” he said.

Jefferson isn’t considering offering insurance through private employers any time soon.

“We’re never going to replace IBC. We’re never going to replace Highmark,” Cacchione said. “We’re there to be a complement and be a choice in the marketplace.”

Lehigh has been talking to potential merger partners both inside and outside of Pennsylvania ever since Nester became CEO in 2014.

“We were close a couple times to other large mergers. Each time, either we passed or the other party passed,” said Nester.

Even while searching for a merger partner, Lehigh Valley Health expanded through acquisitions in northeastern Pennsylvania, as did its main competitors, St. Luke’s University Health Network in Bethlehem and Geisinger Health in Danville (which is being acquired by California health care giant Kaiser Permanente).

Lehigh Valley Health had three major acquisitions during the last decade: Greater Hazleton Health Alliance in 2014, Schuylkill Health System in Pottsville in 2016, and Pocono Health System in East Stroudsburg.

The three acquisitions did not boost Lehigh Valley Health’s profitability, according to Nester, who said Lehigh acquired the facilities to bring more and better services to those communities. “Those are communities we serve, and if we didn’t take over now, they wouldn’t be able to stay open,” he said.

Lehigh Valley Health’s revenue has soared from $1.6 billion in fiscal 2013 to $4.1 billion in fiscal 2023, when the system had its lowest operating profit margin since at least 2008.

The health system also opened three new hospitals, sometimes close by competitors, in Easton, in Dickson City near Scranton, and in Lehighton. Lehigh is also building small hospitals in Macungie and Gilbertsville.

Lehigh emerged from the pandemic without a financial need to merge with a larger organization, but it feels urgency to shore up a future plan.

“Health care will only get more challenging,” Nester said.