Two hospital chains that often have competed for scarce rural physicians decided to combine forces last week with the $161 million merger of Hallmark Healthcare Corp. and Community Health Systems.
"If we get a doctor who wants to go to a small town, we can offer him 35 locations now instead of 20," said Community Health's president and chief executive officer, E. Thomas Chaney.
Physician recruiting is so important to the investor-owned companies that both mentioned it in their 1993 annual reports, along with the more traditional tallies of total assets and operating margins. Houston-based Community claimed 50 doctors recruited in 1993; Atlanta-based Hallmark claimed 40.
Community has a three-person recruitment team, led by James R. McLendon, a former Navy physician recruiter.
Hallmark President Robert Thornton Jr. said the acquisition will increase Community's ability to finance capital improvements, such as medical office buildings and equipment, that are important to recruiting physicians. Hallmark spends about $7 million annually on capital improvements, and Mr. Chaney said his company would be able to increase that level of spending.
"Hopefully, we'll be able to attract more young people," Mr. Chaney said.
Hallmark's hospitals have been much more dependent on Medicare and Medi-caid, which made up 62% of its $179 million in annual revenues. Only 48% of Community's $236 million in revenues come from those governmental sources.
In addition, 10 of Hallmark's hospitals receive a significant amount of Medicaid disproportionate-share funding for treating large numbers of poor people. That funding is being reduced and may be phased out entirely.
The deal calls for Community to exchange 0.97 shares of its common stock for each of the 3 million outstanding shares of Hallmark. In addition, Community will exchange 5.4 shares of its stock for each of the 33,000 outstanding shares of Hallmark preferred stock.
After the merger was announced June 13, shares of Hallmark, which are traded over the counter, jumped 51% to $20. The price was determined, in part, on a multiple of Hallmark's earnings before interest, taxes, depreciation, minority interests and amortization, a figure known as EBITDA. Community is paying 6.7 times EBITDA for Hallmark, a value that the company believed was fair, Mr. Chaney said.
Shareholders will vote on the merger in August or September.
Mr. Chaney and Hallmark Chairman and CEO James T. McAfee Jr. are longtime hospital chain colleagues who worked together in the Atlanta regional office of Hospital Affiliates in the mid-1970s. That company was later acquired by Hospital Corporation of America.
Through the years, the men kept in touch, then a few months ago, they "got to talking" about a merger of their chains of small-town and suburban hospitals, said Mr. Chaney.
Hallmark's two top officials, Messrs. McAfee and Thornton, will lose their positions when the acquisition is completed, although Mr. McAfee will stay on as a Community director. In addition, one of Hallmark's other directors, Kay Slayden, will be placed on Community's board, increasing it to eight members.
Last week, Mr. Thornton said he and Mr. McAfee had no immediate plans.
Hallmark's other 30 employees in the Atlanta corporate office will be interviewed, and their job status will be determined later, Mr. Chaney said.