When not-for-profit hospitals merge, cash rarely changes hands.
But that may be starting to change, thanks to the growing influence of for-profit hospital chains.
The phenomenon of paying cash for tax-exempt hospitals is quite common when a for-profit chain buys a community hospital. In that case, the for-profit typically repays the hospital's debt and puts up additional cash that flows to a not-for-profit foundation.
Why are the deals structured so differently? Tax-exempt hospitals have been deemed a preferable merger partner by many other tax-exempt hospitals by bringing "virtual value" through the benefits of their not-for-profit status. A cash offer often wasn't necessary because the desire to stay not-for-profit was valued by the board more than the money that could be made available by a for-profit corporation.
However, that "virtual value" may be vanishing. Under the scrutiny of competitive-bid situations, more not-for-profits may be pressed to put up cash as part of an offer.
"If Columbia comes to town and says they'll give $100, and I say I'm the market leader so you ought to go with us, well, the board is at least going to find that $100 seductive," said Jake Henry, president and chief executive officer of not-for-profit Spohn Health System in Corpus Christi, Texas.
Henry speaks from experience. In the past couple of months, his system had to outbid Columbia/HCA Healthcare Corp., the nation's largest chain with $17 billion in annual revenues, for two acquisitions.
In Corpus Christi, Spohn submitted the winning bid of $65 million for a 30-year lease of Memorial Medical Center, the county's tax-supported hospital.
And in Beeville, Texas, Spohn outbid Columbia for Bee County Regional Medical Center with its $8.8 million offer for a 30-year lease. Both totals don't include additional guarantees for charity care and capital improvements.
Henry believes such a trend will continue, especially since for-profits are becoming more aggressive in bidding situations.
The trend also occurred in Florida, where embattled Cape Coral (Fla.) Hospital recently agreed to be acquired by not-for-profit Lee Memorial Health System. The Fort Myers, Fla.-based system also had to outbid Columbia. Its cash offer of
$145 million was $3 million higher than the Nashville, Tenn.-based chain's.
Another example unfolded recently in Cookeville, Tenn., where not-for-profit Fort Sanders Health System, Knoxville, Tenn., submitted the winning bid of $140.9 million for a 40-year lease of the city's hospital.
Three other bidders offered to acquire Cookeville General Hospital for nothing; they'd simply take the traditional route of merging it into their not-for-profit systems.
Their bids didn't win.
According to Josh Nemzoff, founder of Nemzoff & Co., a Nashville-based merger and acquisition consulting firm that worked on the Cookeville deal, not-for-profit hospital executives often think: "There's no sense in us paying any money for hospitals when we can merge for nothing."
But as more not-for-profits are forced to put up cash in addition to assuming the facility's debt, the complexion of the industry will change, making the no-cash transaction less of an option.
Last year, 445 community hospitals were involved in mergers, according to a survey by MODERN HEALTHCARE. Of those deals, only 48 involved tax-exempt hospitals being purchased by for-profit chains.
In the vast majority, the deals involved not-for-profit hospitals merging assets. What if the acquiring not-for-profits had to put up capital in all those mergers?
"It would dramatically change what was happening" by requiring not-for-profits to invest more of their cash reserves in acquisitions, Nemzoff added.
It also raises a question of whether bids from not-for-profits should be valued the same as those from for-profits. Some would argue that a community-owned hospital is using community assets to buy another community-owned hospital. Isn't that just an example of robbing Peter to pay Paul?
"It's difficult to ascribe value to what a not-for-profit vs. a for-profit brings," said Jim Forbes, director of the healthcare group for Merrill Lynch, a New York-based investment bank.
He also predicts legal challenges may arise when a not-for-profit hospital accepts a lower bid from a fellow not-for-profit. In such a case, the acquired hospital may have to show why the not-for-profit bid is a better value for the community, he said.
"In evaluating offers from not-for-profit and investor-owned bidders, the seller should not only take into account the purchase price but also the long-term value and impact of each bidder's proposed operation of the hospital on the community," said Pierre Bogacz, senior manager in the Houston office of Deloitte & Touche, a national accounting firm. "While indigent care and staffing levels may vary between not-for-profit and investor-owned hospitals, so will property taxes, income taxes, access to capital and the ability to expand services."
Some argue that cash is cash and the bidder's tax status is irrelevant.
To say a not-for-profit shouldn't pay as much "starts with the presumption that there's something inherently different with the way (for-profits) deliver care," said Jacinita Titialii, director of venture development for investor-owned Tenet Healthcare Corp., Santa Barbara, Calif.
"For-profits are people, too," she said. "We have nurses, physicians, physician extenders, people in the labs that care just as much as those in not-for-profits."