Executives of Saint Joseph Hospital did a slow burn after reading the newspaper stories about the planned merger of their Fort Worth, Texas, hospital with the Columbia/HCA Healthcare Corp. facility down the street.
A story in the Fort Worth Star-Telegram described Columbia/HCA's "voracious appetite for acquisitions," prompting visions of Saint Joseph as just another tasty morsel gobbled up by the nation's largest non-governmental hospital chain. In other words, another one bites the dust.
It wasn't like that at all, protested Saint Joseph's acting chief executive officer, Robert Wardwell, and officials of St. Joseph's sponsor, the Daughters of Charity National Health System. The agreement was one that would consolidate services in an over-bedded Fort Worth market.
"Everyone wins," noted Dennis Eike, vice president of finance for the west central region in the Daughters' St. Louis Office.
Still, when asked whether the system had received a lot of calls about selling the 228-bed Catholic hospital to the Wall Street-backed hospital giant, Mr. Eike paused. Then, carefully, he answered: "We've had a lot of people ask."
Hospitals that for decades have been the cornerstones of the not-for-profit industry-teaching hospitals, Catholic hospitals and other church-affiliated institutions-are for the first time considering deals from investor-owned chains.
According to MODERN HEALTHCARE calculations, executives at 11 not-for-profit hospitals have been in some stage of negotiating a joint venture or selling their hospital to an investor-owned chain since April (See chart, page 27). And others are expected to follow.
Dallas-based American Medical International is working on 30 deals and Columbia/HCA has 40 in the works-most of which are with not-for-profit hospitals, according to top officials of those chains.
Investors drive market. Although some not-for-profits are buying investor-owned facilities -Columbia/HCA's sale of Medical Center Hospital, Huntsville, Ala., to Huntsville Hospital, and Quorum Health Group's sale of Stuart Circle Hospital in Richmond, Va., to Bon Secours Health System, Marriottsville, Md., are recent examples-the bulk of the activity puts investor-owned chains in the buyer's seat.
In some cases not-for-profits are initiating the action, but often the contacts are unsolicited.
Robert O'Leary, AMI's chairman, president and CEO, said the company is especially seeking out "not-for-sale not-for-profits." Instead of waiting for distressed not-for-profit hospitals to seek out help, AMI is targeting those hospitals it wants to acquire.
However, there are trade-offs that must be made part of that strategy. "Because the institutions of interest to AMI are strong and well-positioned, with no immediate pressure to affiliate, the decisionmaking process can be much more prolonged," Mr. O'Leary explained in AMI's annual report.
Columbia/HCA officials have said that the Louisville, Ky.-based chain may operate as many as 500 hospitals within the next 10 years. That would mean adding 30 hospitals a year, a significant addition, but modest by Columbia's recent growth pattern. In the 14-month period from December 1992 to February 1993, Richard Scott, Columbia/HCA's president and chief executive officer, has expanded his company from 20 to 196 hospitals.
"We're talking to everybody that will talk to us," said David Vandewater, Columbia/HCA's chief operating officer.
Leading the way.Columbia's activity accounts for much of the $12.3 billion worth of hospitals that have changed hands since January 1993, according to figures from Robertson, Stephens & Co., a San Francisco-based investment banking firm.
Others are active as well, including AMI, OrNda HealthCorp, Quorum, Community Health Systems, Health Management Associates and Healthtrust-The Hospital Co.
"The competition (to buy hospitals) is more intense now than at any time that I can remember," said Earl Holland, chief operating officer in charge of operations and acquisitions for Health Management Associates, Naples, Fla. "It's not unusual to have 15 firms bidding for a hospital."
While investor-owned hospitals have sometimes traded hospitals among themselves, it's clear that fame and fortune for acquisition-minded companies lie in the tax-exempt foothills, home to 85% of the nation's 5,400 acute-care hospitals.
"The question is not, `Will we network?' but `Under what conditions and with whom will we network?"' said Eugene Trani, president of Virginia Commonwealth University, when asked about his talks with Columbia/HCA. In Richmond, home of Mr. Trani's university, a deal with the university's Medical College of Virginia Hospitals could double the size of Columbia/HCA's network of about 1,000 beds and 650 physicians.
Need for control.Columbia/HCA generally likes to own hospitals in its network, rather than simply affiliate. However, the company participates in provider networks-Houston is a good example-in which it doesn't own the other participating facilities.
To grow in revenues, however, Columbia/HCA needs to add hospitals it can control. To accomplish this goal, the company has shown it can be flexible. For example, in Winter Park, Fla., Columbia/HCA bought a 50% interest in Winter Park Memorial Hospital for $25 million. Columbia is general partner of that hospital, which gives it control and allows it to add Winter Park's total revenues into consolidated results that are reported to investors.
In Louisville, Columbia/HCA leases the 404-bed University of Louisville Hospital. Although Columbia/HCA doesn't own the assets, it has control of the facility's operations and management.
Why now? In Virginia, a change in state law this year gives university teaching hospitals unprecedented flexibility to form joint ventures. So, when Columbia officials called, Mr. Trani listened. Later he met personally with Mr. Scott and Columbia/HCA Chief Financial Officer David Colby.
In other markets, healthcare reform talks in Washington and on the state level are prompting more discussion between not-for-profits and investor-owned chains. Interestingly, while reform legislation is the impetus, the industry seems to be moving in the opposite direction of the debate, which often centers around more federal oversight and taxes to finance healthcare. However, companies like Columbia/HCA -arguably one of the most outspokenly capitalist-minded hospital firms in recent history-are moving toward privatizing what has been largely a community-owned enterprise that enjoys significant tax benefits.
Holy war. Columbia/HCA's pursuit of tax-exempt hospitals resembles a crusade. In a speech to newspaper editors in Seattle earlier this month, Mr. Scott said President Clinton's healthcare proposal will "bankrupt the company," and called for the government to get out of the business of operating hospitals, such as Veterans Affairs and government hospitals.
Acquisitions of or joint ventures with university teaching hospitals, like Medical College of Virginia, may be especially timely. "Their specialty has been tertiary care, and that's the highest-cost element," said Terry Linn, AMI's vice president for development. "That tends to make them look like a high-cost producer."
Such a perception may hurt the nation's 1,300 teaching hospitals when competing for managed-care contracts. In addition, their physicians
-most of whom are specialists-may no longer receive the referrals they need.
Mr. Linn is one of several individuals who are the designated dealmakers and negotiators for investor-owned chains (See related story, page 28). For some, the job includes making "cold calls" to hospital trustees and administrators. Others wait to receive a request for proposal for new business.
The people doing the deals can vary, depending on the circumstances. For example, at Columbia/HCA, regional executives frequently drive the negotiations.
Top guns. In other cases, the "big guns" will step in. For example, when the 17-member board of Hilton Head (S.C.) Hospital narrowed its list to two finalists-AMI and Columbia/HCA-Columbia/HCA Chairman Thomas Frist Jr., M.D., and Mr. Scott made personal appearances. So did Robert O'Leary, AMI's chairman, president and CEO, as well as top officials from Medical University of South Carolina and Bon Secours.
"Each talked about reform and the need for hospitals to align themselves," said Curtis Clayton, Hilton Head's president and chief executive officer. "They were going all out."
Flexibility is important. For example, some hospital trustees don't want to sell their entire hospital, but they'll sell part of it.
That's the case with at least two recent Columbia/HCA deals. The first is Winter Park, located in an affluent section of the Orlando, Fla., market. There, Columbia/HCA structured a deal in which it pays the not-for-profit hospital's foundation $25 million for a 50% interest in the hospital. In addition, Columbia commits $18 million to complete an expansion and modernization plan.
The hospital's governing board is split evenly between Columbia and Winter Park representatives, and the hospital becomes a tax-paying entity.
A version of this also is under way in Alexandria, La., where Columbia/HCA is buying a 50% interest in Rapides Regional Medical Center.
"I have to give Columbia credit," said AMI's Mr. Linn. That 50-50 structure "has been well-received by many. We've been asked if we would do that type of transaction, and we would."
Exercising caution. However, hospitals considering these 50-50 deals need to be careful, said Josh Nemzoff, who advises not-for-profit hospitals considering acquisitions. The senior vice president and principal in the Nashville, Tenn., office of Ponder & Co. said a board composed of 50% for-profit representatives and 50% not-for-profit representatives may sound pretty good. However, "the for-profit members usually will vote as a block, so all they have to do is pick off one of (the not-for-profit's) votes and it's not 50-50 anymore," he said.
Mr. Nemzoff added that hospitals are starting to look more closely at such deals. He suggested that hospitals look at who controls the partnership, the board and the management. "The problem for not-for-profits is that the for-profits are proposing 50-50 ventures, but you need to get them to explain what 50-50 means," he said.
What's more, even though the investor-owned company may control only half the board seats, if that company is the general partner in the deal, it manages the hospital and can't be fired.
In AMI's agreement to buy Hilton Head (S.C.) Hospital, equity will be split between five entities: AMI, Bon Secours Health System, Medical Center of Medical University of South Carolina, the physicians and the hospital's foundation. However, the split won't necessarily be an even 20% all around.
The percentages haven't yet been set, but Mr. Linn said AMI likely will end up with more than 20%, and AMI will exert additional control as the general partner and manager of the hospital.
Although more not-for-profits are listening to sales pitches from investor-owned chains, some roadblocks remain. For example, Quorum has an $11 million not-for-profitacquisition pending in Nebraska. The state health department has said Quorum's plan to acquire 160-bed Midlands Community Hospital in Papillion and convert it to a for-profit facility would lead to higher patient charges. Quorum, which has managed the hospital since 1977, denies that and is suing the state to overturn the certificate-of-need ruling.