Two Missouri hospitals whose proposed merger led to a precedent-setting antitrust ruling in federal court are trying to get reacquainted.
The ruling invalidated the way the Federal Trade Commission analyzes hospital mergers for anti-competitive effects.
Although both sides say they're still committed to completing the deal, they admitted there might be serious bumps along the way because the industry landscape has changed during the two years the case was in litigation.
In fact, the sales agreement between the two hospitals expired in January, and if the deal is pursued, a new agreement will have to be written.
Tenet Healthcare Corp. spokesman Lance Ignon said the hospitals would repeat due diligence.
Under the original agreement announced in April 1997, Santa Barbara, Calif.-based Tenet said it would buy 186-bed Doctors Regional Medical Center in Poplar Bluff, Mo., for $40.5 million from the hospital's physician and employee owners. Tenet owns the city's only other private acute-care hospital, 185-bed Lucy Lee Hospital.
After a long antitrust investigation, the Federal Trade Commission filed suit a year later to block the sale.
At the time the deal was cut, Tenet was in an acquisition mode, and its stock was selling at about $40 per share. Now Tenet is trying to downsize, recently announcing plans to sell as many as 20 of its 130 hospitals, and its stock price has been hovering at about $16 per share (See story, p. 3). The first Tenet hospital to find a buyer was a Missouri facility.
"Clearly if there are no potential obstacles, you don't do due diligence," Ignon cautioned. "We can't portray this as a fait accompli. But we're certainly moving in the direction of completing a merger."
The physician and employee owners of Doctors Regional still want to sell and still want their $40.5 million.
"Now it's a matter of renegotiating that contract. There are still a lot of loose ends," said Bennie Till, M.D., Doctors Regional's acting administrator and board chairman. "The price is still about right, but we're a home-grown hospital, and we have a strong interest in how our patients, community and employees will be treated."
Doctors Regional is owned by an employee stock ownership plan. Thirty-one physicians control 67% of the ESOP, and employees own the other 33%.
Till has been running the hospital since February, when former Chief Executive Officer Daniel Kelly resigned to accept the CEO position at 140-bed Halstead (Kan.) Hospital. Kelly helped negotiate the sale of Doctors Regional to Tenet.
Kelly said under his administration there were "no cold feet" at Doctors Regional. "When you sign a letter of intent you don't undertake serious discussions with anyone else. We honored that."
"Two years is a long time. You have to have some concern," Till said. "But our goals are still the same: to put two marginal hospitals together so we could better compete with surrounding hospitals and offer more-sophisticated services."
Ignon said Tenet is unaware of any changes in circumstances that would blow the deal.
"Our decision to appeal the lower court's ruling demonstrates that we are still committed to the transaction," he said. "Building a single hospital system made sense to us two years ago, and it still makes sense to us today. We are still committed to going forward."
However, Ignon declined to comment on whether Tenet intends to lower its offer for Doctors Regional.
Ignon said the company does not release individual hospital financial information. But a knowledgeable source within the company said Lucy Lee Hospital was profitable in 1997 and is profitable today.
Till said Doctors Regional is even more profitable today than it was in 1997. While he declined to release actual numbers, he said the hospital enjoyed at least $1 million more in annual revenues in 1998, with an additional profit of about $300,000 more than 1997 profits.
Late last month, the 8th U.S. Circuit Court of Appeals in St. Louis overturned a lower-court decision granting the FTC's motion for a preliminary injunction blocking the sale.
The 8th Circuit said the lower court erred by accepting the FTC's argument that the two hospitals competed in a narrow geographic market and the court should have considered the economic efficiencies created by merging the two facilities (July 26, p. 2).
The FTC is considering an appeal and has a pending administrative antitrust complaint against the hospitals.
If the Poplar Bluff deal crumbles, it wouldn't be the first time a hospital merger blessed in court couldn't survive a postponed honeymoon.
In 1997 the only two hospitals in Dubuque, Iowa, scrapped their proposed mergerlike partnership while waiting for the same 8th Circuit to render a decision on their fate.
The 8th Circuit was hearing the government's appeal of a lower-court decision. The lower court threw out the U.S. Justice Department's antitrust challenge of the proposed partnership, which had been first proposed in 1993.