In a major coup, Caremark International has acquired Friendly Hills HealthCare Network, thus ending the La Habra, Calif.-based medical group's short life as a tax-exempt public charity.
The deal positions Caremark as a major player in the physician-group market and comes a week after the Northbrook, Ill.-based company was indicted by a federal grand jury for allegedly paying illegal kickbacks to a pediatrician for prescribing a drug distributed by the company.
Financial terms of the agreement weren't released. However, Friendly Hills executives confirmed that the purchase price was more than $125 million-the estimated amount Friendly Hills spent last September to transform its for-profit physician-hospital organization into a not-for-profit foundation (See chart).
The deal, which both sides are calling a long-term affiliation agreement, remains subject to regulatory approvals in California and Washington. It is expected to be completed during the fourth quarter of 1994.
Under terms of the agreement, Caremark will purchase essentially all Friendly Hills' assets from the foundation, including its 274-bed acute-care hospital in La Habra, the network's main campus, and its 14 medical offices in Orange and Los Angeles counties.
Friendly Hills Medical Center recorded a net income of $576,279 in 1993 on net patient revenues of $53 million, compared with earnings of $49,401 on revenues of $43 million in the previous year, according to information compiled by HCIA, a Baltimore-based healthcare information company.
In addition, Caremark signed a definitive agreement to buy Strategic Health Care Management, Friendly Hills' for-profit physician group consulting subsidiary. Overall, Caremark will manage the business operations of Friendly Hills and will provide capital, information systems and other patient-care resources.
Although Caremark is buying and managing the business operations, the Friendly Hills Healthcare Foundation will remain in place, executives said. Caremark plans to donate more than $500,000 to the foundation to help it develop managed-care education programs for healthcare professionals.
With the addition of Friendly Hills, Caremark's group practice network will increase to more than 450 physicians, 55% of whom are primary-care practitioners. The group will manage more than 250,000 patients on a capitated basis.
Its current network of regional multispecialty physician group practices includes Kelsey-Seybold Clinic, a 165-physician practice in Houston, and Oklahoma City Clinic, which has 100 physicians.
For Caremark, the deal marks its largest physician practice acquisition to date. Acquiring Friendly Hills solidifies its physician practice management business and provides a proven model for Caremark to market to its current physician practice business.
"This agreement with Friendly Hills clearly puts us far ahead as the market leader (in integrated delivery system management)," Caremark Chief Executive Officer C.A. Lance Piccolo said. "This whole arena of physician practice services is a very important area for our future growth."
Caremark, the nation's largest provider of alternate-site services, provides home healthcare, mail-order prescription services, physician practice management, nephrology, oncology and orthopedic services. It spun off from its former parent company, Baxter International, in November 1992.
Mr. Piccolo was reluctant to discuss whether this month's indictment against the company affected-or will affect-Caremark's affiliation with Friendly Hills.
"That's an inappropriate question. (The indictment) isn't relevant to this," Mr. Piccolo said. "We expect to be vindicated."
Friendly Hills Chairman and CEO Albert Barnett, M.D., said the indictment didn't affect negotiations between the two organizations and isn't expected to affect their future relationship.
On Aug. 4, a Minneapolis grand jury indicted Caremark and five individuals, accusing them of being involved in a $1.1 million illegal kickback scheme (Aug. 8, p. 4).
Sources familiar with the probe told MODERN HEALTHCARE the company is also under investigation by federal authorities in Ohio and about a dozen cities nationwide. The inquiries center on whether Caremark offered physicians improper incentives.
Anti-kickback provisions of the Medicare and Medicaid fraud-and-abuse laws bar any form of remuneration to induce patient referrals. Criminal violations are punishable by fines and possible imprisonment. Civil violations are punishable by expulsion from the Medicare and Medicaid programs.
For Friendly Hills, the agreement marks an about-face, as the integrated delivery system returns to the for-profit healthcare business.
In July 1991, during negotiations with Loma Linda (Calif.) University Medical Center, Friendly Hills first announced its intent to switch to a not-for-profit foundation.
"We both wanted to build a stronger structure, retain autonomy and have better access to capital," Dr. Barnett said in September 1991.
And it initially appeared as if they would. In February 1993, the Internal Revenue Service approved Friendly Hills' transformation in a precedent-setting decision.
By September, Friendly Hills HealthCare Foundation-with financing help from New York investment banking firm Cain Brothers-bought the assets of the group practice from the network for $125 million. Dr. Barnett and other Friendly Hills managers became recognized experts in developing foundation-based delivery systems.
But, the foundation didn't last. An internal memorandum evaluating the merger hinted that the Friendly Hills foundation model was unsuccessful because the economic incentives of physicians and the hospital weren't in accord.
Seven months later, the not-for-profit foundation entered into talks with Caremark; the two groups officially agreed to terms on Aug. 9.
"(Friendly Hills') new ownership structure is going to position itself to compete more effectively in a rapidly consolidating marketplace," said Dan Cain of Cain Brothers. "After this, a lot of people are going to stop and re-evaluate future transactions of this sort."