With managed care continuing to erode the bottom line of stand-alone hospitals, and big for-profit chains duking it out nearly everywhere for market share, trustees should expect to confront the issue of merging with a larger operator.
However, unlike years past, when the "due diligence" review of such consolidations could be completed in a couple of months, trustees should expect 1997 to bring a denser thicket of legal obstacles to navigate. Not only will flexibility and creativity be needed in further deals, but trustees should also expect to cast a keener eye toward the charitable funds they establish with the proceeds from their transactions.
Although the vast majority of hospitals remain stand-alone facilities, the breakneck acquisition pace of Tenet Healthcare Corp. and Columbia/HCA Healthcare Corp. have left the two companies controlling a combined $35 billion in annual hospital revenues, a number expected to climb steadily. Their size and market share have begun attracting the news media attention the HMO industry began receiving several years ago. Because most hospitals are considered major sources of charitable work in their community, any deals made with a for-profit operator will now be closely watched.
In California, by far the leader in hospital transactions in 1996, two deals-both joint ventures with Columbia rather than outright acquisitions-came under regulatory fire. That happened just weeks after a state law was passed-effective Jan. 1-requiring the state attorney general to review such transactions. Attorney General Dan Lungren made Sharp HealthCare of San Diego agree to halt its joint venture pending renegotiation because it considered its assets to be undervalued.
When officials at Riverside (Calif.) Community Hospital received a copy of the order sent to Sharp, it inspired hospital officials to seek a meeting with the attorney generazl's office. Without even receiving a standstill order, Riverside has decided it wants to revise its deal to ensure approval. Many of the changes will hinge on allowing Riverside to invest its proceeds in a way that will not endanger its charitable mission.
Meanwhile, trustees, often focused on the post-merger mission of their hospitals, should expect the charitable funds they establish to come under greater scrutiny.
The number of such funds coming into existence is impressive: Some 100 have been created from not-for-profit hospital conversions in the past two years, according to the Council on Foundations, a trade group in Washinton.
Combine that pace with welfare reform laws virtually guaranteeing cuts in the states' Medicaid budgets in the coming years, and the debate will quickly intensify over whether proceeds should be used to bolster the healthcare system or earmarked for other projects that might benefit the surrounding community.