A banana split without bananas is just a bowl of ice cream. Is a hospital company that has no hospitals still a hospital company?
The answer may be in the eye of the beholder.
The number of companies that have jumped into the game of hospital acquisitions is growing. But in some cases, the companies have few if any hospitals to show for their efforts.
Far from defensive about their strikeouts, however, these entrepreneurs insist they are very much in the game-perhaps even more so than their counterparts that have scored many hospitals over the past few years but are now shedding facilities to try to pump the red ink out of their balance sheets.
"We have a number of transactions we've signed up, but none have closed yet," said Joshua Nemzoff, a healthcare consultant with Nemzoff & Co. and the founder of MissionHealth, a Nashville-based hospital investment company he formed in February 1998. Nemzoff has repeated that refrain often during the year and a half his company has existed.
Nemzoff said MissionHealth is not a traditional hospital company. It was created to provide equity capital to not-for-profit hospitals. The hang-up so far has been persuading not-for-profits that MissionHealth can invest in them and they can still maintain their tax-exempt status.
Some hospitals have responded to his sales pitch by saying it sounds too good to be true, Nemzoff said.
"We used to say we provide equity financing for nonprofit hospitals," Nemzoff said. "The way we explain it now is: We say we have $2 billion in capital financing. We provide money to your hospital, which provides significant opportunities for you to use our capital in a structure that is very different from what you've seen before."
So far no hospitals have bitten on MissionHealth's offers. These days, the wariness goes both ways, Nemzoff said.
"What's happening is, we're getting to see an awful lot of hospitals that had good credit a couple of years ago, and now they're calling us up," he said. "My response is, 'You should have called me two years ago.' "
Nemzoff said MissionHealth is often compared with Vanguard Health Systems, a Nashville-based hospital company that has attempted numerous negotiations but has only one hospital to show for it.
Vanguard Chairman, President and Chief Executive Officer Charles Martin Jr. founded the company in January 1998 with a stated goal of converting not-for-profit multihospital systems to investor-owned status while keeping their community missions intact. So far, the company has had only one taker, Maryvale Hospital Medical Center in Phoenix, which was previously owned by Phoenix-based Samaritan Health System.
Vanguard is said to be in negotiations with Triad Hospitals, a spinoff of Columbia/HCA Healthcare Corp., to buy two hospitals in California. Vanguard is also rumored to be a contender for some of the about 20 hospitals Tenet Healthcare Corp. is trying to sell (June 14, p. 2).
Those who know Martin have said the slow acquisition pace results from strategy, not bad dealmaking.
"He probably doesn't have more than one hospital because he's just as picky as I am," Nemzoff said.
John Hindelong, a healthcare analyst at Donaldson, Lufkin & Jenrette in New York, said these small, private companies are wise to weigh each acquisition opportunity carefully.
"There are plenty of hospitals for sale, but the question is whether the hospitals are strategically well-positioned," he said. "That winnows the list down."
A newer addition to the no-hospital club is Essent Healthcare, launched in June by W. Hudson Connery Jr., former chief operating officer of Healthtrust-The Hospital Co. The Nashville-based company has set out to buy community hospitals through partnerships with nearby tertiary-care centers, but Connery does not expect to make his first acquisition until early next year.
"If I wanted to buy a hospital, I could buy it right now," he said. "(But) if you buy the wrong property and/or you buy a property at the wrong price, it's nothing but problems."
A. Ronald Turner, president and CEO of Associated Healthcare Systems, Alpharetta, Ga., agreed that acquisition opportunities are on the upswing, partly because of an industrywide tightening of access to capital. His company is trying to buy three hospitals from Houston-based Paracelsus Healthcare Corp. in a deal that has taken longer than expected.
Associated Healthcare, formed in April, was originally going to buy four Paracelsus hospitals but recently dropped one from the potential deal because of its poor performance, Turner said. The company has not completed any other deals.
"We have to be more selective," he explained. "Our business plan is not to run the Kentucky Derby. We're in a marathon rather than a sprint."
Another member of the no-hospital club is Iasis Healthcare, a Nashville-based company incorporated in February 1998 and funded with seed capital last August (See story, this page). Iasis has billed itself as a healthcare management services company that specializes in hospital ownership and physician practice development. It offers physicians an equity interest in its hospitals, said Kenneth Perry, a company co-founder and its chief financial officer. Healthcare analysts have also mentioned Iasis as a possible buyer of some Tenet hospitals.
The company's president and CEO is Wayne Gower, a former Columbia/HCA Healthcare Corp. division president.
Perry said the company has not jumped into hospital deals yet because it is embracing a "disciplined" approach. "Very disciplined," he said. "You only get a chance to start a company once."