Merger consultants have a saying they like to offer as seasoned advice: "If you've seen one merger, you've seen one merger."
That's gained a new degree of truth in recent months as hospital mergers get more and more complicated. Several deals have included multiple partners, shared equity, joint operating agreements and other, well, weird arrangements.
It used to be a joint venture meant a simple transaction between two partners. Now some include three or more partners or two partners joining together to buy a third hospital.
Imagine a Monopoly game in which two players own part of Park Place and three players own Boardwalk. It would lower the amount of money needed to buy the properties, but it also would decrease how much rent each player collects. The level of competition and complexity of the game also would change.
That reflects some of the current realities of hospital buyouts. And judging from recent transactions, it seems that buyouts are getting even more complicated.
Just last week, Presbyterian Healthcare System, a not-for-profit hospital in Dallas, and Lake Pointe Medical Center, a for-profit hospital in Rowlett, Texas, agreed to buy Physicians Regional Hospital in Wylie, Texas.
In normal times, this would be considered an unusual partnership. No more. So far this year, there have been at least five similar deals in which a for-profit and a not-for-profit team up to buy a third hospital (See chart, this page).
Experts say there are some sound reasons for these multiple-partner deals. For example, they spread the risk. If operations turn sour, there isn't just one owner holding the bag. Another advantage is that one partner represents local control and the other brings capital to the deal. That's especially important in deals in which an investor-owned chain and a regional system pair up, such as in Palestine, Texas. In that case, Principal Hospital Corp., Nashville, Tenn., is teaming up with a regional health system in Tyler, Texas.
On the other hand, multiple partnerships can be more time-consuming and problematic. And although the financial risks won't be as great, the rewards won't be either.
Columbia/HCA Healthcare Corp. has 20 hospitals it operates as joint ventures with another partner. Its earnings from those hospitals were
$41 million in the first quarter of 1996. *Columbia's profits would have been twice as much if the company owned 100% of those hospitals.
Earnings diminish even more if the company owns less than half of a facility. That will be the case with some of Columbia's recent deals in Ohio in which the company and another hospital system are buying a third hospital.
Columbia has entered a 50-50 joint venture with Sisters of Charity of St. Augustine Health System, Cleveland. Now, the joint venture is buying two hospitals, Saint Luke's Medical Center in Cleveland and Massillon (Ohio) Community Hospital.
This might seem to complicate an already complex deal. Yet, Massillon Community executives see it as no different than taking on just one partner.
"We're not finding it any more difficult than (making a deal) with another local provider," said Jerry Rizor, the hospital's vice president of marketing and planning.
When asked what prompted the deal, Rizor gave the two most popular reasons: being in a network and the need for capital.
Massillon already had talked for more than a year with the most logical partner, its chief competitor, Doctors Hospital of Stark County. Those talks broke off last year, Rizor said.
"It appeared that Columbia could offer us things that were more appealing on a grander scale," Rizor said. "Columbia has so much experience."
Oddly enough, the only two acute-care hospitals in the town of Massillon agreed to merger deals the same week, and both chose three-way transactions.
Doctors is joining with Quorum Health Group, a Brentwood, Tenn.-based investor-owned company, and Summa Health System, a not-for-profit based in Akron, Ohio. Terms of the deal haven't been disclosed.
"I think it's a neat idea if the two partners have worked together and have a history of collaboration," said Rufus Harris, principal with the Tribrook Group, a consulting firm based in Oakbrook, Ill.
Sometimes that's not the case, however. In the high-profile sale of Cookeville (Tenn.) General Hospital, three not-for-profit hospitals in Nashville, Tenn.-Baptist Hospital, Saint Thomas Hospital and Vanderbilt University Medical Center-put together a bid even though the facilities are competitors in their hometown. The trio, which called itself the Middle Tennessee Healthcare Group, didn't win. Cookeville instead chose Fort Sanders Health System of Knoxville, Tenn.
"Many times it's a defensive posture for the not-for-profits," said Josh Nemzoff, a Nashville-based mergers consultant who was hired to advise Cookeville on those bids. In the Cookeville case, several for-profit hospital companies were vying to buy the hospital (May 13, p. 48).
The same was true in Louisville, Ky., where two competing not-for-profit systems joined to bid for University of Louisville Hospital. That hospital was being operated by Columbia, but the university put it up for bid when Columbia moved its headquarters out of Louisville. Jewish Hospital Healthcare Services and Alliant Health System won the contract to manage the hospital for 15 years.
Combining forces looks like a good compromise because "not-for-profits like to hedge their bets a little," Nemzoff said.
However, patience must reign in deals in which not-for-profit hospitals join forces to buy other hospitals. "Typically, a not-for-profit institution has a fairly large board," said Ann James, who leads the health section law practice group in the Houston office of Jenkens & Gilchrist. "You can spend untold amounts of time trying to explain the deal," she said. That's exacerbated when multiple not-for-profit hospitals are involved.
Phyllis Brasher, another attorney with Jenkens & Gilchrist, is working on a deal in which three Louisiana not-for-profit hospitals are buying an equity interest in a fourth hospital in Ruston, La. She said it involves lots of conference calls and face-to-face meetings to ensure everyone stays informed.
"Conference calls will not work with the medical staff," Brasher noted. "They want to see face to face who these new partners are."
Added Harris: "Which option you're going to pursue is very attitudinal. I hear some hospital boards say they're tired of governance, and others aren't."
If board members are tired of overseeing the hospital's operations, a joint venture isn't necessarily going to get them out of it. However, if they want to continue, a joint venture may allow them to keep their hands in it.
Another unusual arrangement that allows shared risk is when a hospital buys a minority interest in another facility. That's the case in Virginia, where Williamsburg Community Hospital is selling a minority interest to Sentara Health System, about 50 miles away in Norfolk, Va. The percentage hasn't been determined, but it may be up to 50%, officials said.
"The community wants community-based healthcare," said Les Donahue, Williamsburg Community's president and chief executive officer. This was reinforced to him when the hospital hosted a series of town meetings to talk about what was best for the hospital. Executives also heard offers from three other possible partners, for-profit and not-for-profit.
The hospital wanted to be in a system, but it didn't want to lose control. "If you sell all of your assets, you don't have the right to tell the acquiring organization what to do," Donahue said. He calls it a shared-equity model.
So what's the down side? These are crazy times when buyout strategies sometimes seem to run amok. Your partner today may be your enemy tomorrow.
In fact, that's what happened in Florida when Orlando Regional Health System was a partner with Healthtrust in ownership of South Seminole Hospital, Longwood, Fla. Then Healthtrust became part of Columbia, which wasn't exactly the deal Orlando Regional entered. That's because Columbia was Orlando Regional's chief competitor in the area. And even if they wanted to jointly own South Seminole, the Federal Trade Commission wouldn't let them.
The result was an expensive lawsuit because Columbia and Orlando Regional couldn't agree on which party should sell and for what price. Last month, a federal judge ruled that Columbia must sell its 50% stake (May 6, p. 2). The price hasn't been determined.
James said partners can avoid such problems by including safeguards in their partnership documents.
"You have to say these are the triggers that let you get out of this. This is what you get back, and this is what you don't get back," she said.