With Columbia/HCA Healthcare Corp. sitting on the sidelines, not-for-profit healthcare systems are trying to run up the score on merger and acquisition activity.
In fact, they may even be exploiting Columbia's troubles.
Since July 25, when Richard Scott resigned from the Nashville-based company and Thomas Frist Jr., M.D., replaced him as chairman and chief executive officer, investor-owned Columbia hasn't announced any new hospital acquisitions.
Meanwhile, 40 not-for-profit healthcare systems have announced deals involving mergers or acquisitions of 50 hospitals, according to Irving Levin Associates of New Canaan, Conn.
Two of the not-for-profit systems' targets were hospitals Columbia plans to spin off. The beleaguered Columbia, which is the subject of an ongoing federal healthcare fraud investigation, announced last month it will spin off one-third of its hospitals into three new publicly traded companies (Nov. 24, p. 2).
Despite Columbia's decision to alter its strategies and focus on existing operations, the not-for-profit sector isn't about to change its relatively new aggressive ways.
VHA, the nation's largest alliance of not-for-profit hospitals, is forming a company to acquire not-for-profit facilities in New Mexico and Texas. A similar VHA venture ceased operations earlier this year.
In addition, Daughters of Charity National Health System completed a $1 billion bond offering in September through its charity obligated group. That's the largest bond offering by a not-for-profit healthcare system to date, according to New York ratings firms Fitch Investors Service and Standard & Poor's.
"We don't see whatever changes might happen at Columbia as a reason for us to be less motivated for the future," says Donald Brennan, president and CEO of Daughters of Charity, a St. Louis-based Roman Catholic system.
The group allows other not-for-profit systems to pool financing with Daughters of Charity and build on its plan to link freestanding hospitals with other not-for-profit providers in community-based networks.
"What's happening at Columbia may have the opposite effect," Brennan says. "Those in not-for-profit healthcare may now see the opportunity to get stronger."
Cash ammunition. Not-for-profit hospitals and healthcare systems certainly have plenty of cash to pick up where Columbia has decided it will go no longer.
Multistate not-for-profit hospital systems had an average of $450 million in unrestricted cash and investment dollars to spend on acquisitions in 1996, according to a survey by Moody's Investors Service in New York. That amount has more than doubled from $200 million in 1992 when a similar tally was taken.
Freestanding not-for-profit hospitals had an average of $37 million in unrestricted cash and investment dollars in 1996 compared with $19 million in 1992, Moody's says.
"We think they are trying to keep their powder dry," says Bruce Gordon, vice president of Moody's healthcare finance division. "We think they are bracing for market and governmental developments."
When Columbia was in its acquisition mode two years ago, not-for-profits had their backs to the wall in many markets. In 1995, Columbia's last banner year of acquisitions, it acquired or formed joint ventures with 33 not-for-profit hospitals. That number was cut almost in half to 17 in 1996.
VHA gets riled. Even though Columbia's acquisitions were dropping, it pulled off a joint venture last year with VHA member St. David's Health Care System of Austin, Texas. It was a particularly difficult acquisition for not-for-profits to swallow. The St. David's deal spurred 23 VHA member hospitals in Texas and New Mexico to back up their anti-Columbia rhetoric with cash.
Despite Columbia's ebbing tide, VHA Southwest is going ahead with plans to form a company to acquire not-for-profit hospitals in New Mexico and Texas. It's launching the company, called Community Health Corp., to take over not-for-profit hospitals tempted to join the other side.
Community Health is garnering more interest than another venture that VHA invested in, which failed to keep hospitals community-owned.
That venture, called InteCare, dissolved in May after only 18 months of operations. It was designed to help not-for-profit hospitals convert to for-profit status while remaining locally controlled in an effort to preserve the traditional community hospital model.
In the end, InteCare's supporters blamed its demise on bad publicity surrounding its for-profit ownership (June 2, p. 3).
Unlike InteCare, Dallas-based Community Health is a tax-exempt not-for-profit corporation, which its supporters hope will be more palatable.
"It's a separate, not-for-profit corporation designed to keep the hospitals not-for-profit," says Dan Wilford, chairman of Community Health and president of Houston-based Memorial Hermann Healthcare System.
Wilford says the company has accessed $15 million to $20 million to acquire, lease or manage hospitals, all in the name of keeping them not-for-profit. If it needs to, he says, the company could leverage $150 million or more.
That includes $5 million that VHA corporate headquarters in Irving, Texas, has agreed to put toward Community Health. "We haven't had to call on that money yet," Wilford says.
New opportunities. Columbia's restructuring may offer more opportunities, Wilford says.
"Our basic initial concern was to preserve not-for-profit hospitals, but there may be some opportunities to acquire Columbia hospitals," he says. "If Columbia is going to stop acquiring or consolidating not-for-profit hospitals, then there may be opportunities for us. Our objective is to have a strong network of not-for-profit hospitals throughout Texas and New Mexico."
Community Health has yet to close a deal to preserve a not-for-profit, but it is getting close. It's involved in bidding to lease at least three not-for-profit hospitals in Texas.
Supporters expect some headway now that the organization has hired a chief executive. "Up until now, our support of not-for-profit hospitals has been technical," says Michael D. Williams, who last month was named president and CEO of Community Health.
Williams returns to Dallas after nine years in Knoxville, Tenn., where he most recently was president and CEO of Baptist Hospital of East Tennessee. In Dallas, he held various managerial positions at Children's Medical Center and Baylor University Medical Center.
Community Health bills itself as the "nation's first organization formed to acquire, lease or manage hospitals in an effort to preserve the not-for-profit status of community hospitals."
But it appears other not-for-profit hospitals and healthcare systems across the country stand at the ready, licking their chops over acquiring some of Columbia's hospitals.
"If Columbia is serious about selling off some of its hospitals, there are a lot of not-for-profit hospitals out there who would be interested in taking them up," says Dan Bourque, VHA's senior vice president of corporate and public affairs in Washington.
If Community Health is successful, VHA is considering replicating the idea in other areas of the country where investor-owned hospital companies are looking.
"This model has some appeal and some potential," Wilford says. "There has been interest in various markets like Florida, Georgia and Tennessee."
The not-for-profit sector's decision to stay aggressive may prove important for the long haul.
Down, not out. Many observers say Columbia will remain a force to contend with in several markets.
"Assume they sustain everything they've put in motion, they have the opportunity to come back as one of the most competitive companies" in healthcare, says Edward Hopkins, partner at the Miami-based law firm Steel Hector & Davis.
Columbia's latest move to spin off 108 -- about one-third -- of its hospitals will create smaller, but more concentrated, markets for the company.
Even after the reorganization, Columbia will remain the nation's largest healthcare company, with 232 hospitals. Santa Barbara, Calif.-based Tenet Healthcare Corp. is No. 2 with 131 hospitals.
David Whelan, principal at Atlanta-based Hamilton-HMC, says Columbia will pull out of markets where it doesn't have a majority share. The company hopes the downsizing will eventually make it stronger and more concentrated in markets where it had a strong presence to begin with.
"Columbia will still be aggressive in markets they're already in," Whelan says.
Hopkins adds that Columbia may become a "more dangerous and efficient company than before."
But until Columbia completes its reorganization -- which the company says may take 12 to 18 months -- the market is in play for several for-profit and not-for-profit systems.
New strategies. Many for-profit systems will have to revisit their acquisition strategies, says Mark Oshnock, a partner at Arthur Andersen's Atlanta office. For years, Columbia piled up acquisitions, and many systems simply followed the leader, Oshnock says. Now, many companies will have to take a second look at their strategies.
"They may not change" their strategies, Oshnock says, "but most likely they will change the focus of their go-out-and-acquire mentality." They will begin to take a closer look at why they need to do deals instead of trying to keep up with Columbia's former pace.
And even though the perceived pressure to make deals may no longer exist with Columbia's slowdown, the need for consolidation is still there for not-for-profits, Whelan says.
"The driving force behind consolidation is the need to have a network of providers that can offer . . . economies of scale," Whelan says. "This element still exists."
For-profit companies like Tenet will continue to be aggressive, but they also will be selective in their acquisitions, Whelan adds.
Lower prices. Additionally, price tags on deals may soften without Columbia in the picture. When Columbia was in its acquisition mode, it was willing to pay for the strategic value of being in certain markets, Whelan says.
A standard measure for hospital acquisitions is four to five times the hospital's cash flow or earnings before interest, taxes, depreciation and amortization, or EBITDA. In its acquisition heyday, Columbia was paying as much as six or seven times EBITDA.
"The value of a hospital is different to each buyer," Whelan says. "The most important factor is, does (the newly acquired hospital) keep the network [email protected]"