Colorado-based Catholic Health Initiatives (CHI) and Dignity Health, headquartered in San Francisco, signed a nonbinding letter of intent “to explore aligning their organizations,” including a possible merger. 

The move builds on a partnership the two organizations announced in September, called the Precision Medicine Alliance LLC, which they said will create the country’s largest community-based precision medicine program. 

CHI is the third-largest nonprofit health system in the U.S., with 103 hospitals, 30 critical access facilities, 4,300 physicians and advanced-practice clinicians, and approximately 100,000 employees. It operates in 18 states. Dignity Health, also a nonprofit, is the fifth-largest health system in the nation, with 39 hospitals in California, Arizona and Nevada. Its network covers 22 states and includes more than 400 care centers, approximately 9,000 physicians and about 62,000 employees. There is no overlap in the locations of the two systems’ hospitals.

Both systems have Catholic and non-Catholic hospitals. Together, they provided $3.8 billion in charitable care in the last fiscal year. 

The organizations have combined annual revenue of nearly $28 billion, The Wall Street Journal reported, adding that CHI had $9 billion in debt as of March 31. According to Becker’s Hospital Review, Moody’s Investors Service rated the potential alignment as positive, noting that it would likely result in “expanded market access, improved efficiencies and the opportunity to achieve a number of synergies.”

The two organizations said discussions would probably continue through early 2017.

Our Take: It’s too early to tell whether the organizations will combine. But all you have to do is look at a location map and see that the organizations have virtually no geographic overlap.

We reached out to our contacts at both organizations, and we learned that for CHI, it’s a matter of increasing its reach into California, Nevada and Arizona— three states where it is noticeably absent. For Dignity, it’s a question of whether it wants to take on CHI’s massive $9 billion debt.

Dignity CEO Lloyd Dean is credited with turning around an organization that once, too, was saddled with debt and riddled with inefficiencies. CHI may be larger, but on paper looks a lot like the ailing Community Health Systems that has earned a lot of recent negative press. CHI has everything to gain, but we believe that Dignity will ultimately see a merger as too risky.

But a merger is just one of many potential options. These days, health systems are finding novel ways to partner, from ACO-like agreements and clinically integrated networks to regional purchasing alliances and health information exchanges. One of these arrangements, or something novel, is a more likely path for these two sizable health systems to take.

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