Want to see your hospital's valuation plummet? Stay on the sidelines when networks are forming.
That's exactly what happened to three Community Health Systems hospitals in the St. Petersburg, Fla., area, according to Jeffrey Villwock, a healthcare analyst for New Orleans-based Johnson Rice & Co.
The three hospitals may have lost $50 million in valuation last year after Nashville, Tenn.-based Columbia/HCA Healthcare Corp. merged with Healthtrust and a large tax-exempt network formed. Through the Healthtrust merger, Columbia added three hospitals to its Tampa-St. Petersburg network. The new CareFirst Health Network comprises seven not-for-profit hospitals in the Tampa Bay area.
"The market was dissected in two, and the (CHS) hospitals were on the outside looking in," Villwock said. He added that the situation could be a lesson for others.
Last October, CHS, an investor-owned system based in Nashville, agreed to swap three hospitals in the Tampa-St. Petersburg market and Hillside Hospital, a sole provider in Pulaski, Tenn., for a single Columbia hospital, North Okaloosa Medical Center, in the Florida Panhandle.
One could argue that Columbia was pressed to dump 110-bed North Okaloosa, in Crestview. Columbia had agreed to sell the hospital as part of a Federal Trade Commission order that allowed Columbia to complete its merger with Healthtrust last year.
Even so, Columbia seemingly is getting the better end of this trade. It's swapping a hospital with $33 million in annual revenues for four hospitals with $76 million. The Tampa-area hospitals are Pinellas Community Hospital, Pinellas Park; University General Hospital, Seminole; and Seminole Hospital and Women's Center.
What prompted the deal was the deteriorating financial condition of the three Florida hospitals. CHS officials told stock analysts that the hospitals' operating margins plunged to 2% in the third quarter of 1995, compared with 15% in the year-ago quarter.
Using the hospitals' annual earnings before interest, taxes, depreciation and amortization, or EBITDA, and a multiple of six, Villwock figures the three Florida hospitals were worth $83 million, and the Pulaski hospital was worth $20 million. He puts North Okaloosa's value at $47 million.
Based on those numbers, Columbia seems to be winning. However, the future did not look bright for the three Florida hospitals. "Physicians began to understand that by practicing at the (CHS) hospitals, they were being excluded from the growing managed-care volume," Villwock said. Because most physicians practice at more than one area hospital, they can move their patients to other facilities, and in some cases the managed-care contract may dictate that.
"This exodus of physicians accelerated once it began and accelerated again when rumors about a potential sale by CHS hit the hallways," Villwock said.
That's not the only thing that went downhill. When CHS announced the swap with Columbia, its market capitalization dropped $140 million in a single day. The stock has since recovered somewhat.
CHS officials said they can't comment on the transaction, which is still pending.
However, David "Rusty" Mayeux, senior vice president of venture development for Tenet Healthcare Corp., said such situations can be a bellwether for urban hospitals.
"Unless you're a sole community provider, you have this risk," Mayeux said. "That should drive more transactions over the next five years than any other single factor."