While the nation's largest for-profit chain retrenches, members of a not-for-profit healthcare consortium are barreling ahead to solidify their market positions.
In scores of meetings and conference calls involving as many as 60 people, the consortium secretly negotiated a deal to acquire a chunk of Columbia/HCA Healthcare Corp.'s 45-hospital Atlantic Group.
Last week Columbia and the eight-member buying group (See chart) disclosed the pact. The consortium plans to acquire 22 Columbia hospitals and related properties in four Southeastern states for $1.2 billion in cash. The deal, first reported in MODERN HEALTHCARE (May 4, p. 4; May 11, p. 4), is said to be the largest single purchase of assets by a group of not-for-profits.
The 22 hospitals have 2,854 staffed beds and $36.2 million in annual net income on total annual patient revenues of $1.6 billion.
The deal enables Columbia to deploy some of its noncore operations and generate needed cash, said Elie Radinsky, a director and corporate healthcare analyst with Standard & Poor's.
Columbia has said it will either divest the remaining Atlantic Group hospitals or spin them into one of its other divisions.
Some analysts believe the deal is bound to trigger federal antitrust flags because it will give some of the not-for-profit buyers dominance in their respective markets.
On the other hand, if buyers don't become overly weighted down in debt, the deal could produce long-term benefits.
"It is not a blow to the for-profit industry or anything like that. It's a very smart, strategic and financial move on the part of Columbia, and it's a very strategic move on the part of the providers," said James Forbes, a director of debt and equity financing at Merrill Lynch & Co.
The deal also illustrates a recent trend. MODERN HEALTHCARE's 1998 Multi-unit Providers Survey (p. 35) shows not-for-profit hospitals and systems are growing faster than the investor-owned sector.
Even before Columbia announced plans to restructure its hospital divisions last November, systems in the Southeast had been scouting the company's properties.
William Atkinson, president and chief executive officer of 547-bed New Hanover Regional Medical Center in Wilmington, N.C., had his eye on two Columbia facilities: 56-bed Brunswick Hospital in Supply, N.C., and 109-bed Cape Fear Memorial Hospital in Wilmington. But Columbia didn't want to bother negotiating one-and two-hospital sales. Atkinson said the company responded to an inquiry by the hospital's board of trustees by saying, "Thank you, but no thank you."
Winston-Salem, N.C.-based Novant Health, one of the buyers, also had been on the prowl for Columbia hospitals before the consortium deal. The eight-hospital system retained Salomon Smith Barney to help identify key properties and run the financials. Meanwhile, the New York-based investment banking firm began talking up the consortium concept with other not-for-profits in the region.
"We concluded that the only way to get (Columbia's) attention was to get a critical mass," said Fred Hessler, co-head of Salomon Smith Barney's healthcare finance group, which pulled the deal together. "With the vehicle of the consortium, we created the opportunity for a willing buyer and a willing seller to negotiate," he said.
On paper, the consortium never existed. Its sole purpose: to smooth negotiations with Columbia, eliminating the need to haggle with eight different buyers.
Still, there were a few rough spots. It's no surprise that price emerged as one of the touchier issues. "That took a good long time to sort out," Hessler said.
Each buyer entered its own contract with Columbia and will arrange its financing through a combination of debt and equity.
With minor exceptions, the contracts were identical, said J. Vaughan Curtis, a healthcare partner with Atlanta-based Alston & Bird, the consortium's legal adviser. One constant was the use of a single cash-flow formula to establish each buyer's price, buyers said.
In today's market, a purchaser might reasonably expect to pay six to eight times earnings before interest, taxes, depreciation and amortization, or EBITDA, a measure of cash generated by a tax-paying hospital. But the consortium is paying much more, closer to 10 times future cash flow, on average, analysts said.
"Tommy Frist got a great price for these properties," said one industry analyst, who asked not to be identified. The analyst was referring to Columbia President and CEO Thomas Frist Jr., M.D.
But David Cyganowski, a co-head of Salomon Smith Barney's healthcare finance group, begged to differ. He said Columbia's stock price declined during the week after the deal was disclosed-evidence that buyers did not overpay. He said the consortium did not pay a multiple of 10 times cash flow for the properties but declined to disclose pricing specifics. He said a formula was used only in discussing price but that each price was individually negotiated.
Columbia spokesman Jeff Prescott would not discuss the company's pricing requirements either. But it's clear Frist wouldn't have agreed to sell the hospitals if he could get a better outcome by spinning them off in a separate company as Columbia initially proposed.
Nancy Weaver, an analyst with Stephens in Little Rock, Ark., said the consortium deal was good for Columbia because on an after-tax basis Columbia got a multiple of seven times future cash flow, the same as what it would have generated in a spinoff.
Consortium members acknowledged the high price of doing business with the national hospital chain. "Yeah, we're paying a handsome price, but each one of us is doing it . . . because we have a strategic reason for doing so," said Paul Wiles, Novant Health's president and CEO and past chairman of Irving, Texas-based VHA, a hospital alliance.
Some buyers said they were willing to pay a premium to bolster their regional delivery networks and eliminate Columbia as a competitor.
Louisville, Ky.-based Alliant Health System, for example, intends to fill out its continuum of care by acquiring three hospitals in its own backyard and a fourth in Lebanon, Ky. With the additional sites, the system will control some 45% of the market. It currently has a 25% market share, said Steve Williams, president and CEO of Louisville's largest system.
Williams said he expects the system's partnerships with Jewish Hospital in Louisville to continue, and a spokeswoman for Jewish echoed his sentiment. Alliant and Jewish jointly operate University of Louisville Hospital.
A spokeswoman for Louisville-based Humana, a major payer in the region, had no comment on the impact of the deal.
But Sue Stout Tame, president of 407-bed Baptist Hospital East in Louisville, which is across the expressway from Columbia Suburban Hospital, expects heightened competition between the two not-for-profit hospitals. Alliant's proposed acquisition includes 380-bed Suburban.
Consortium members expressed confidence in securing required antitrust clearances. But observers cited Louisville; Montgomery, Ala.; and Johnson City, Tenn., as potential hotbeds for federal scrutiny.
Johnson City Medical Center Hospital is the most blatant example. With its proposed purchases, the hospital would control 100% of the acute-care business in Washington County. But Dennis Vonderfecht, the 407-bed hospital's CEO, draws the market's lines more broadly because more than half the hospital's patients come from outside the county.
If federal trust-busters were to bring suit, the not-for-profit buyer could be forced to sell the assets in dispute, perhaps at a loss, observers said.
The deal is structured so that a majority of the market transactions must receive the appropriate approvals before the parties close. The goal is that everything gets closed at the same time, said Salomon Smith Barney's Cyganowski.
Blue Cross and Blue Shield of Tennessee, the state's largest payer, is monitoring the situation with great interest, said Ron Harr, a vice president of the 1.8 million-enrollee plan. But he said Blues officials don't yet know the impact of Johnson City's proposed purchase on its enrollees.
In addition to broadening their market clout, consortium members cited the common goal of returning community hospitals to the stewardship of voluntary trustees.
Four of the eight buyers are members of VHA, a strong proponent of not-for-profit healthcare. VHA Senior Vice President Daniel Bourque said the conversion of Columbia hospitals makes good economic sense because local decisionmakers now can eliminate duplicative investments that had been part of the "arms race" with Columbia.
VHA has jousted with Columbia for years over which ownership sector better serves the public interest. The alliance also has rallied against not-for-profit conversions.
"At the heart of (the deal's) success was clearly the commitment to public health, and returning hospitals to the public fold made sense," said New Hanover's Atkinson. "We weren't simply chasing the dream without checking the dream."