Tax-exempt hospitals won't be easy pickings for investor-owned chains in 1997.
As state attorneys general begin to scrutinize more deals and not-for-profit systems become more aggressive, investor-owned chains should brace for a challenging year ahead.
The bulk of investor-owned chains' future growth has to come from the not-for-profit sector. That's partly because there will be one less hospital company on the market by the end of March, when the nation's second- and third-largest chains complete their merger. Santa Barbara, Calif.-based Tenet Healthcare Corp.'s proposed $3.1 billion acquisition of OrNda HealthCorp of Nashville, Tenn., will create a company with 126 hospitals in 22 states.
The number of acquisitions of not-for-profit hospitals closed by Columbia/HCA Healthcare Corp., dipped substantially last year. In 1995, the company completed 33 such deals. By December of 1996, it had completed just 17. The nation's largest owner and operator of hospitals now commands nearly 350 facilities.
Columbia and other chains are becoming even more creative to get tax-exempt hospital boards to sign pacts.
For example, nine of Columbia's 14 outstanding letters of intent were for joint ventures with hospitals. That is a sign the not-for-profits want a continued stake in the action and that Columbia is willing to give in to more demands.
Investor-owned chains also are seeing more competition among fellow investor-owned firms, especially in rural markets, where Health Management Associates of Naples, Fla., has built an impressive track record. In the past five years, HMA's revenues have grown an average of 21%, while its earnings have jumped an annual average of 29%.
In the past two years, several companies, including New American Health Systems and Principal Hospital Co., both of Brentwood, Tenn., and NetCare Health Systems of Nashville, have started acquiring smaller rural hospitals.
While these start-ups may even be gobbled up themselves, they are off to an impressive start.
A major coup this year was the acquisition of Portland, Ore.-based Brim by Principal, which was formed less than a year ago. Principal now owns and operates seven hospitals as a result of the acquisition.
The good news for start-ups is there's more than enough action out there. There are some 2,400 tax-exempt rural hospitals.
Some firms may not be around-at least in their current form-to see all the acquisition activity. They include Naples-based Community Care of America, which is looking for a buyer after a disastrous 1996. Several healthcare firms have been approached by CCA through its investment firm, Smith Barney. In 1996, CCA canceled a second stock offering and saw its top executive resign.
Another candidate is Houston-based Paracelsus Healthcare Corp. It also is shopping some of its facilities after getting off to a rocky start as a publicly traded firm. Sources say Paracelsus, which faces several shareholder suits, may end up selling as many as one-third of its hospitals to stem the tide of its losses. The suits charge the company did not disclose its true financial condition prior to its August merger with Champion Healthcare Corp.