When Columbia/HCA Healthcare Corp. merged its four San Antonio hospitals in a 50-50 joint venture with the city's largest not-for-profit hospital 21 months ago, the investor-owned chain's executives said they weren't likely to do many more deals like it.
The aggressive Nashville, Tenn.-based company doesn't like to give up control when acquiring healthcare facilities. With nearly 350 hospitals, Columbia is the nation's largest hospital chain.
But the success and popularity thus far of Columbia's partnership with 553-bed Southwest Texas Methodist Hospital is triggering a new wave of similar acquisitions and partnerships for the healthcare giant.
"In terms of the numbers of organizations that have been interested, the San Antonio project has garnered more attention than any of our others in the country," said James "Denny" Shelton, Columbia's central group president in Dallas. "It has been mind-boggling."
What made the deal special is it was the first in which Columbia shared equally in financial risk and governance with a not-for-profit hospital.
If Columbia's pending hospital acquisitions are any indication of the direction the company is headed, 50-50 joint ventures figure to be a paramount strategy for the future. As of Aug. 15, nine of 14 hospitals that had signed letters of intent with Columbia involved 50-50 ventures (See chart).
Terms of the recent letters of intent weren't being disclosed, but the combined annual revenues of the hospitals involved are about $1.4 billion.
"(Columbia executives') thought process is that their ultimate goal is to consolidate their market, but their No. 1 preference is to acquire outright," said Peter Costa, senior vice president and healthcare research analyst in the Boston office of Chicago Corp., an investment banking firm.
But more than 25 not-for-profit hospitals and healthcare systems interested in similar 50-50 positions with Columbia have visited the San Antonio venture, said John Hornbeak, Methodist's chief executive officer.
Most of Columbia's joint ventures involve a 50-50 equity stake, but Columbia typically has served as managing partner and has held control. Columbia's partners in those deals wind up with limited liability.
When the Methodist deal closed in January 1995, it broke new ground for Columbia. "At that point, we had not had to do a deal where we gave up as much as we did, but we aren't really giving up anything-we are entering into new partnerships," Shelton said.
The two partners share governance on a 10-member board with five representatives from Methodist and five from Columbia.
"(Columbia's) change of mind (to do more 50-50 deals) was born out of good experience," Hornbeak said. "They are fast learners."
One of the key reasons not-for-profit hospitals are attracted by Columbia's offers is the company typically retires the hospitals' debt. For example, Methodist's $126 million in debt was retired as part of the deal, and Columbia paid Methodist $74.7 million in cash (Feb. 6, p. 41).
"The big question is, do these (joint venture hospital deals) do better or do they do worse?" said John Runningen, healthcare analyst for Robinson-Humphrey Co., an Atlanta-based investment bank. "The jury is still out on that."
But the early returns in San Antonio are favorable.
Methodist no longer faces annual interest expense of $8.3 million because its debt was retired. In addition, tapping Columbia's purchasing power allowed Methodist to save another $6 million in 1995. "Last year we were just beginning to transfer our purchasing contracts, so we expect to save even more this year," Hornbeak said.
As a taxable entity for the first time, Methodist paid more than $5 million in sales and property taxes in 1995. Even after paying its 1995 tax bills, Methodist posted a first-year savings of more than $9 million.
However, critics of the San Antonio deal and others like it say it's unclear what the long-term effects will be on the hospitals should Wall Street sour on such ventures. Others rail against these joint ventures as they do for-profit acquisitions of not-for-profits, saying for-profits answer to stockholders first and serve the community second.
But Methodist Healthcare Ministries, parent of the hospital and Columbia's equal partner in San Antonio, has been satisfied with the deal, which set up a $44 million foundation.
"We decide how the money is spent," said Kevin Moriarty, CEO of Methodist Healthcare Ministries.
Methodist has bolstered its primary-care initiative, Wesley Community Center, which includes a health clinic. What had been a facility serving 80 indigent patients a day on an annual budget of $260,000 has grown to a center serving 800 patients a day on an annual budget of $2 million. The clinic is open Monday through Saturday for 50 to 60 hours, compared with five to eight hours a week before Methodist's affiliation with Columbia.
Methodist Healthcare Ministries has set a budget goal of $12 million to
$15 million by 1999. "We would be close to spending the $16 million to $17 million spent this year by the San Antonio United Way," said Moriarty, who joined Methodist after 14 years as head of the San Antonio Department of Initiatives, the city's welfare and human services department.
Last year, Methodist Healthcare Ministries received $12 million, or half the profits made by all Columbia and Southwest Methodist properties in San Antonio.
By October, the ministries hope to have contracts with four other not-for-profit community healthcare centers in San Antonio. Next year, Methodist will begin replicating its Wesley center throughout the system. Officials say there is a need to expand in the market, where one-fourth of the population falls below the poverty line.
"I would suggest that after we succeed in providing this new model, they can come see it," Moriarty said in response to critics of the joint venture. "Doing is a lot better than talking. Then they can not only see it but they can feel and touch it."