Darrell Sapp, Post-Gazette Mercy Hospital of Pittsburgh as seen from the Hill District yesterday.

By Christopher Snowbeck, Pittsburgh Post-Gazette

The University of Pittsburgh Medical Center is poised to control more than half the hospital market in Allegheny County following yesterday's deal giving it control of venerable Mercy Hospital, the city's first permanent hospital and the region's largest Catholic medical center.

While UPMC and Mercy officials expressed confidence that the proposed merger would pass regulatory review, competitors immediately questioned the further growth of the Oakland-based behemoth. UPMC already operates 17 hospitals in Western Pennsylvania, and is the region's largest private employer with more than 40,000 employees.

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"We remain concerned that this latest acquisition of a hospital by UPMC is yet another elimination of that choice in the market and reflects a further attempt by UPMC to establish a health care monopoly in the area," said Tom Chakurda, spokesman for the West Penn Allegheny Health System, itself formed by a merger six years ago of West Penn and Allegheny General hospitals and related affiliates.

But Cliff Shannon, a board member with the Pennsylvania Health Care Cost Containment Council, said the alternative to a UPMC merger might have been a closure of Mercy, whose finances have been under strain for years.

"Employers that have been paying attention understand that we've been moving from three choices," UPMC, West Penn Allegheny and Mercy, "to two and a half choices, already," said Mr. Shannon, who is also president of Churchill-based SMC Business Councils, a small business lobby. "One-third of the state's hospitals have, on a three-year average, lost money -- including Mercy. That can't go on indefinitely."

UPMC and Mercy officials were careful to describe the transaction as a merger, not a sale -- and waffled when asked if the institution would be called UPMC Mercy, as it was in the news release issued by Mercy to announce the deal.

Executives at both Mercy and UPMC stressed that no layoffs are planned and that Mercy would continue as a Catholic hospital with canonical oversight from the Catholic Diocese of Pittsburgh.

The parties said their letter of intent would transfer ownership of Mercy Hospital and a network of employed physician practices from Newtown Square, Pa.-based Catholic Health East to UPMC.

The agreement includes a $100 million contribution by UPMC to a charitable fund administered by the Sisters of Mercy, who created the hospital in 1847, the first of many Mercy hospitals founded across the country.

Darrell Sapp, Post-Gazette The Rev. Lawrence DiNardo, left, vicar for legal and canonical services, and Sister Margaret Hannan, president of the Sisters of Mercy Pittsburgh, listen as Jack McGinley Jr., chairman of Pittsburgh Mercy Health System board of trustees, answers questions during yesterday's news conference. Click photo for larger image.

The Sisters of Mercy would continue to operate Mercy Jeannette Hospital in Westmoreland County, as well as Mercy Behavioral Health, four outpatient centers and three senior care facilities.

The agreement is not yet final, but officials said they hope to close the deal by the beginning of next year.

Among the regulatory reviews that must occur is one by the state attorney general who will study the transaction to determine if it might result in Pittsburgh residents being charged higher prices for hospital services, said Barbara Petito, spokeswoman for the attorney general's office.

John R. McGinley Jr., chairman of the board at the Pittsburgh Mercy Health System, said the decision to transfer ownership followed a review of the hospital's financial performance as well as the region's health care market.

In the past three years, Mercy Hospital and Mercy Primary Care lost more than $42 million on operations, he said. The financial struggles have made the hospital an outlier among medical centers controlled by Catholic Health East, a 33-hospital system.

Mercy suffered from tough competition from the larger UPMC and West Penn Allegheny systems -- a costly dynamic that involves not just patients but the physicians who treat them. As an example, Mr. McGinley noted that Mercy paid a high price earlier this year to recruit anesthesiologists as doctors shifted allegiances among local hospitals.

In the end, Mercy was unable to finance needed capital improvements, such as an emergency room renovation, and improvements for operating rooms and intensive care units.

As Ken Eshak, the hospital president, wrote in a message distributed to physicians yesterday morning: "Mercy Hospital requires significant capital investments ($60 million) in new technology and facility improvements, and our financial projections indicate that Mercy will not generate enough income in the future to make these major investments."

During 2005, Catholic Health East had a profit of $219 million on revenue of $4.2 billion. For the fiscal year that ended in June, UPMC reported a $523 million profit on revenue of nearly $6 billion.

Robert Cindrich, the general counsel for UPMC, said the health system will maintain Mercy's obstetrics department as well as its trauma center. The trauma unit garnered national headlines this summer for its treatment of Pittsburgh Steelers quarterback Ben Roethlisberger following his motorcycle accident.

The health system will learn, with help from the diocese, about the differences involved in running a Catholic medical center, Mr. Cindrich said.

For years, Mercy has provided a high level of uncompensated care among hospitals in Allegheny County, and officials pledged to maintain the hospital's charity care program. As a Catholic hospital, it does not perform abortion, sterilization, tubal ligation and other procedures that are at odds with Catholic ethics.

For UPMC, the Mercy merger brings hospital beds to a system that otherwise was looking to construct a new inpatient tower at nearby UPMC Shadyside. Mr. Cindrich said it wasn't yet clear how yesterday's news would affect planning for the new tower, but he said that the Mercy facility would, in general, alleviate crowding at Shadyside as well as at UPMC Presbyterian.

Mercy also operates a burn unit, which the UPMC system currently lacks.

"Pretty much what you see at Mercy today will be here. The idea is to enhance and add to, not take away from," Mr. Cindrich said. "There may be movement of some other services that aren't here now into Mercy, so that we can make full use of the bed space that is here."

He disagreed with the view by other hospitals that the merger would reduce hospital competition.

"The public lost a choice when St. Francis was forced to cease operations. It will lose another choice if Mercy suffers the same fate," Mr. Cindrich said. "Our combination with Mercy does not eliminate, but rather preserves choice for people of the region -- the choice to go to a faith-based hospital."

The $100 million contribution by UPMC will be used to enhance programs for the poor and meet other community needs, said Sister Margaret Hannan, president of the Sisters of Mercy.

She said the sisters might model their efforts after the Jewish Healthcare Foundation, which was created in the early 1990s out of the merger of Presbyterian University and Montefiore hospitals to create UPMC. As part of the Montefiore merger, UPMC contributed $75 million to the Jewish Healthcare Foundation.

Linda Ross, the spokeswoman for Mercy, said hospital officials talked with Highmark Inc. and a group called Catholic Health Partners about possible mergers or financial help. But the UPMC offer of merger, absorption of the hospital's debt of about $100 million and the $100 million charitable contribution was the strongest that the hospital received.

Mr. McGinley said the transition should be a good one for the 2,900 employees of Mercy Hospital and the affiliated physician practice group. UPMC benefits tend to be richer than those offered by Mercy, he said, and the alternative to merger might have involved significant downsizing.

As an attorney, Mr. McGinley was involved with the liquidation of St. Francis Medical Center, the city's other major Catholic hospital, after it closed in 2002. The memories of that closure, as well as the prospect of Pittsburgh lacking a Catholic hospital, altogether, were at the forefront in the decision to merge with UPMC, he said.

"Both St. Francis and Mercy evolved at a time when this city had 600,000 people in it, and as the city reduced in size, health care didn't reduce with it -- it expanded with it," he said. The problems at the two hospitals, he said, had nothing to do with Catholicity, but "everything to do with demographics."