Forget Goliath. In the for-profit hospital sector, the Davids are taking over.
While for-profit hospital titans such as Columbia/HCA Healthcare Corp. and Quorum Health Group battle federal whistleblower lawsuits claiming fraud, smaller companies with a nonurban focus will continue to make deals and remain highly profitable in 1999.
Low managed-care penetration in nonurban markets, which don't have patient bases large enough to justify managed care's presence, is driving growth for the for-profit hospital companies in this sector.
Sheryl Skolnick, a healthcare analyst with BancAmerica Robertson Stephens in New York, points out that many nonurban hospitals aren't stuck haggling over prices with managed-care organizations like their city counterparts because they are usually the only game in town.
The more successful for-profit companies in 1999 will be Naples, Fla.-based Health Management Associates; Brentwood, Tenn.-based Province Healthcare; and Province's neighbor in Brentwood, privately held Community Health Services. These are the companies that will be making the most strategic purchases, insiders say. Part of their success stems from their management teams, which have been in the hospital business for years.
This is not to say acquisitions will be moving at a fast pace for the for-profits in 1999. According to New Canaan, Conn.-based Irving Levin Associates, for-profits did 39 deals as of Dec. 14, a 22% decrease from 1997, when Columbia -- historically the main acquisitions driver -- stopped its buying spree because of the huge federal probe into its billing practices. Overall, hospital deals decreased 28%, to 143, as of Dec. 14. With Columbia still reorganizing, for-profits will focus on investing in existing facilities.
But 1999 will bring at least two new for-profit hospital companies to the arena. Columbia hopes to spin off its Nashville-based 22-hospital LifePoint Hospitals and its Dallas-based 42-hospital Triad Hospitals in the first half of the year.
The spinoffs could contribute to a Columbia turnaround next year. With the spinoffs, the company expects to have sold $4.5 billion in assets by the end of the first quarter. Already, third-quarter figures were showing some growth for the nation's largest for-profit hospital chain. At the 232 hospitals Columbia will keep, admissions were up slightly. Debt, which was at $6.8 billion at the end of the third quarter, is being pared.
A settlement with the federal government relating to the 1997 probe into Columbia's billing practices may come by the end of the first quarter. It's not clear how much Columbia will end up paying, but the amount may be significantly less than the $1 billion anticipated.
The nation's second-largest for-profit hospital company, Tenet Healthcare Corp., will also spend a good deal of time reconstructing operations at the eight facilities it recently acquired from bankrupt Allegheny Health, Education and Research Foundation. Tenet has experience in turning money-losing hospitals around, but this will be a big challenge. If Tenet is successful, look for it to move into other Northeastern markets,
Quorum will have a tough year improving its bottom line -- and its image. The company projects earnings will be 6% to 10% below previous expectations for fiscal 1999. Quorum also has said that even though it hit its target of two hospital acquisitions in fiscal 1998 -- 160-bed Unimed Medical Center, Minot, N.D., and 211-bed Wesley Medical Center, Hattiesburg, Miss. -- the hospitals need a lot of capital.
Front-line executives are saying a number of good acquisitions are in the pipeline.