Are the terms offered for hospital acquisitions by tax-exempt and investor-owned organizations converging? And if so, is it because these two subsectors of the hospital industry are growing more alike, or because the pool of hospitals for sale is changing?

Anu Singh, a senior vice president with advisory firm Kaufman Hall, Skokie, Ill., contends that deals made by tax-exempt and investor-owned acquirers used to be very distinct. Typically, investor-owned companies wanted to make straight acquisitions for cash, and tax-exempt systems pursued noncash mergers with other tax-exempt providers, Singh says.

There were plenty of exceptions to this rule, of course—investor-owned companies pursued joint ventures with some tax-exempt providers (April 3, 2006, p. 6), and a consortium of tax-exempt systems bought 21 hospitals for $1.2 billion in 1998 from what was then known as Columbia/HCA Healthcare Corp. (Nov. 9, 1998, p. 36).

More recently, investor-owned and tax-exempt acquirers have been looking for whatever they can do to make their offers more attractive, Singh says. The nonfinancial terms that Nashville-based Vanguard Health Systems and Boston-based Steward Health Care System agreed to last year in acquiring Detroit Medical Center and Caritas Christi Health Care, Boston, signaled a move toward the approach that tax-exempt systems take to deals, Singh contends.

“A for-profit might be making a capital commitment that implies keeping the facilities open for years anyway, so why not promise that?” Singh says.

Another example is the joint venture announced over the winter by Duke University Health System, Durham, N.C., and LifePoint Hospitals, Brentwood, Tenn. (Feb. 7, p. 12), Singh says. LifePoint is the majority and managing partner of Duke LifePoint Healthcare, bringing its experience in managing rural hospitals and its capital access to the partnership. Duke brings its clinical reputation and its physicians to the joint venture, which already has two deals to acquire tax-exempt hospitals in North Carolina.

Tax-exempt acquirers recently have shown more willingness to include upfront cash in deals in order to meet the objectives of sellers, Singh says. He cites two examples. In March, Trinity Health, Novi, Mich., agreed to pay $75 million toward the construction of a medical research center and assume some debt in order to acquire Loyola University Health System, Maywood, Ill., from its current owner, Loyola University Chicago (March 7, p. 4). And in February, St. Louis-based Ascension Health formed a joint venture with private-equity firm Oak Hill Capital Partners to acquire capital-strapped Catholic hospitals that don't want to lose their identity (Feb. 21, p. 6).

There are other examples from recent months as well. WakeMed Health & Hospitals, Raleigh, N.C., has made an unsolicited offer to UNC Health Care, Chapel Hill, to buy its Raleigh hospital, Rex Healthcare, for $875 million, with about $125 million of that going to pay off Rex's debt, according to WakeMed's most recent offer. Englewood, Colo.-based Catholic Health Initiatives has agreed to provide $320 million in cash to a yet-to-be-named system that would combine two CHI-affiliated systems in Kentucky with the University of Louisville Hospital (June 20, p. 6).

Carsten Beith, managing director and co-head of tax-exempt hospital mergers and acquisitions for Cain Bros., an investment bank, believes it's not so much the acquirers but the sellers who have changed.

Cain advised Caritas Christi on its deal with Steward, which is owned by private-equity firm Cerberus Capital Management. Beith agrees that the terms were a little more restrictive on Steward than in many such deals, but suggests that was driven more by the nature of the Massachusetts attorney general's review of the deal. In that state, Beith says, the attorney general can consider the value of maintaining community benefits in the fair-market-value calculation, so it was worthwhile to spell those out in the deal.

Beith argues that it's the greater financial health of sellers that is perhaps driving investor-owned and tax-exempt acquirers to more similar offers. When the sellers are not financially distressed, Beith says, “They can demand more both financially and nonfinancially.”

Some boards of seller hospitals are looking for commitments to integrated delivery strategies, for example, Beith says. Boards are spending more time to understand the clinical quality infrastructure and physician alignment strategies of potential acquirers, he adds. These goals, especially in terms of physician alignment, are difficult for standalone hospitals to achieve on their own because they cannot be financed with tax-exempt bonds, Beith says. Bonds can be issued for hard assets, such as buildings or equipment, but not for the intangible assets that make up a significant part of a physician practice acquisition, he says.

For sellers, the convergence is a boon, Kaufman's Singh says. “Historically, a seller may have felt that they were limited by two different divergent paths”—outright sale to an investor-owned company or a noncash merger with a local tax-exempt system, Singh says. “Now they can look at more of an apple-to-apple comparison. It's not exactly the same, but it's a lot closer. A seller can see much more easily whether a deal will meet their needs.”