The American Hospital Association intends to spend at least $40 million in cash to acquire as many as four companies in fields ranging from real estate management to physician recruitment to medical transportation, according to AHA documents obtained last week by MODERN HEALTHCARE.
The documents say the Chicago-based hospital trade association is not interested in acquiring hospitals or other organizations that provide direct patient-care services.
However, the companies acquired by the AHA could give the association a competitive edge over other companies, including some operated by the AHA's own hospital members, because the AHA may market its newly acquired services directly to its 5,000 hospital members nationwide.
The AHA's shopping spree comes as it continues to downsize its Chicago operations because of budget constraints. It is divesting ancillary businesses such as its liability reinsurance company and fee-for-service activities and restructuring around core membership services such as advocacy and education. In addition, the association is having trouble selling its old Chicago headquarters building and is working to dump the bulk of the contents of its 75-year-old library, whose annual operating budget in 1994 was about $1.5 million.
Richard Wade, the AHA's senior vice president for communications, said there was nothing incongruous about the possible acquisitions and internal restructuring at the association.
"This has nothing to do with what kind of an organization we want to become," he said. "We're not going to invest in more overhead here."
Wade also downplayed the immediacy of the possible acquisitions.
"We just wanted to get a sense of possible ways to invest our money and possibly add to our subsidiary fold," he said. "This is a real basic first step."
The AHA would operate any new lines of business through AHA Services, a wholly owned for-profit subsidiary.
AHA Services, in turn, operates two for-profit subsidiaries, including the association's publishing operations and remaining insurance company.
In a Dec. 12 letter sent to about 200 investment firms, the AHA said it is "actively embarking on an acquisition program to acquire one to four companies that would fit with (its) current subsidiaries and objectives."
The AHA said the money to buy the companies comes from the AHA's sale of its liability reinsurance company last May to MMI Cos. of Deerfield, Ill., for $33 million in cash and stock. The company, Health Providers Insurance Co., sold excess liability coverage to hospitals above their basic level of liability insurance. It insured about 2,000 hospitals directly or through policies issued by other firms.
Of the $33 million the AHA received for HPIC, $15 million was in cash. The value of the MMI stock was $18 million but has risen substantially since the deal closed (Oct. 9, 1995, p. 6).
An MMI spokeswoman said the AHA as of last week hadn't sold its stock.
Last fall, Wade said the AHA didn't intend to sell off its MMI stock. But he said last week that it is "conceivable that we would sell some stock down the road for the right opportunity."
Wade said the decisions to sell HPIC and acquire other companies were unrelated. "We didn't sell HPIC with the notion of getting into something else. HPIC would have needed an enormous investment in the future, and it made sense to sell now."
Wade said the determination to make new acquisitions occurred in the past 90 days and was approved by the AHA's board last month.
In its acquisition search documents, the AHA said it wants as many as four companies that "correspond to the overall strategy and values of the AHA." The association identified 11 business lines in which it has an interest (See chart). The AHA said it has "no interest" in hospitals, outpatient clinics, medical device manufacturers, laboratories or insurance underwriters.
The AHA said the companies should have a minimum of $1 million in annual revenues, generate a profit margin of between 12% and 15% and require no significant cash infusion or capital investment.
The AHA didn't specify a timetable for making the acquisitions but indicated that it intends to market the acquired services to its members.
It said AHA Services "may represent a uniquely attractive acquirer for businesses providing unique products or services to healthcare providers given our outstanding relationships with our approximately 5,000 institutional members and over 50,000 individual members. In addition to our value created by our unique ability to access and market to our affiliated members, our equity return targets of 12% to 15% may make us more attractive than a leveraged private equity group."
But Wade said the AHA hasn't decided whether to sell new services to members or make them available as a membership benefit. He also said the AHA doesn't intend to compete "in any major way" with similar products and services already marketed by member hospitals.