Who's in charge here?"
"Both of us are."
When two strong hospital systems last month put together a partnership, it involved a series of trade-offs to get the deal done.
The nation's largest hospital chain, Columbia/HCA Healthcare Corp., merged its four San Antonio hospitals with Southwest Texas Methodist Hospital in a 50-50 deal. Methodist, a 573-bed facility with 1993 revenues of $196.7 million, is San Antonio's largest private hospital.
Every hospital merger has its own unique financial twists, and this is no exception.
The San Antonio deal is the first partnership in which the Louisville, Ky.-based hospital chain shares equally in risk and governance with a tax-exempt organization. Typically, Columbia/HCA wants to be the general partner in such arrangements, which gives it control.
"We will not do many of these transactions," said James "Denny" Shelton, Columbia/HCA's central group president of the San Antonio joint venture. In this case, "a hospital like Methodist brings so much value to our network."
For example, in Columbia/HCA's joint venture with Rapides Regional Medical Center in Alexandria, La., Rapides has 50% equity but is a limited partner with limited liability.
Equal partners. To make the San Antonio partnership a 50-50 deal, both Columbia/HCA and Methodist had to bring equal value to the table.
However, Methodist hospital was worth more than the four Columbia/HCA facilities. "We valued it on an earnings basis," Shelton explained. Instead of using asset figures, the hospitals' values were based on their earnings before interest, taxes, depreciation and amortization, a formula known as EBITDA.
After that valuation, and subtracting debt, Columbia/HCA paid Methodist $74.7 million to make the partnership equal.
Although Methodist had explored merging with other tax-exempt hospitals in San Antonio, a partnership with Columbia/HCA was the most advantageous, executives said. Advantages mentioned included lowering costs through purchasing and technology, being included in regional, state and national managed-care contracts, and repaying Methodist's debt.
Taylor Boone, board president for Southwest Texas Methodist Hospital and chairman of the board of the partnership, called Methodist Healthcare System, knows other hospitals will be watching to see how the partnership with Columbia/HCA works out.
"We already have people coming down to look at us," he said.
The new partnership will be governed by a 10-member board, half from Methodist Hospital and half from Columbia/HCA. Methodist, which answers to the Southwest Texas Conference of the United Methodist Church, will set up a new foundation that will remain tax-exempt.
Each partner has five board members and each partner's members vote as a block. In other words, Columbia/HCA members can't seek to entice a single Methodist member to join them to sway a particular vote, or vice versa.
"We either agree to agree, or agree to disagree," Shelton said.
Change in tax status.
Methodist Healthcare System now becomes a tax-paying entity, an aspect Boone said he's certain was the right decision. "You're misleading people to say a hospital like Methodist is not-for-profit," he said, noting that Methodist was consistently profitable. "That's a joke; it's tax-exempt." In 1993, Methodist's operating profit was $5.4 million.
About $27 million in proceeds from Columbia/HCA's payment to Methodist will go into the new tax-exempt foundation. Typically, when an investor-owned hospital chain buys all or part of a not-for-profit hospital, the proceeds-after repaying debt-funnel into a foundation. The foundation then makes grants to support charitable purposes in the community.
However, Boone said Methodist's new foundation will be "an operating healthcare system."
Another unique aspect of the partnership deal is that Columbia/HCA had to end its physician syndication in San Antonio because of tax jitters from Methodist.
"(Methodist) had a great deal at stake in terms of their tax-exemption," Shelton said. "We didn't want to push it."
Last April, Columbia/HCA approached physicians in San Antonio about purchasing a 20% stake in Columbia/HCA's network. Columbia/HCA has put together similar syndications in other Texas and Florida metropolitan markets.
In San Antonio, about 125 units were sold at $15 per share. Units ranged from 1,000 to 15,000 shares. However, the buyback was profitable for the physicians, who received nearly twice their investment in less than a year.
The amount the physicians received was based on the same EBITDA valuation used to set up the partnership with Methodist, Shelton said. The value of the Columbia/HCA system had increased since the syndication was completed, meaning physicians' investment also increased in value. "The hospitals' performance had improved dramatically," he said.
Before Columbia/HCA acquired the four hospitals, the facilities "had been capital-starved, and there were a lot of hard feelings (among physicians)," Shelton said. The chain, then Columbia Hospital Corp., took over the hospitals in its 1993 merger with Galen Health Care.
Shelton said the new tax-paying Methodist Healthcare System likely will go back to physicians with another syndication offer in the near future.