There are some perks to being a private for-profit company, and Community Health Systems is taking full advantage of them.
While CHS' publicly traded competitors have been buffeted by Wall Street's ups and downs and fettered by public disclosure requirements, CHS has been quietly building up a cache of rural hospitals that has put it at or near the top of the heap among rural hospital companies.
And it isn't stopping there.
In 1998, the Brentwood, Tenn.-based company acquired five hospitals for a total of $188 million, and so far this year, it has bought two more for $44 million. CHS President and Chief Executive Officer Wayne Smith said the 45-hospital chain has about 15 hospitals in its acquisition pipeline and has signed letters of intent to purchase five of those.
The letters of intent are for Evanston (Wyo.) Regional Hospital, owned by not-for-profit Intermountain Health Care (See story, this page); Crosby Memorial Hospital in Picayune, Miss., owned by for-profit New American Healthcare; King's Daughters Hospital in Greenville, Miss., a not-for-profit stand-alone facility; Northeastern Regional Hospital in Las Vegas, N.M., another stand-alone not-for-profit; and the public Lincoln County Memorial Hospital in Troy, Mo.
The company has also bid on other hospitals this year, including Logan (W.Va.) General Hospital, a not-for-profit in the midst of bankruptcy proceedings. The hospital's future hasn't been decided.
Generally, the company seeks not-for-profit hospitals in rural communities with populations of 20,000 to 80,000 where it can be the sole provider.
Despite its acquisition tear, it can be choosy. CHS recently backed out of a bid to buy not-for-profit Victor Valley Community Hospital in Victorville, Calif., because the state legislative and attorney general's office were considering imposing mandates on nurse staffing ratios and binding charity-care levels (July 26, p. 20).
CHS' volume growth and revenue growth are ahead of the industry averages, Smith said. The company's revenues increased to more than $850 million in 1998 from $38 million in 1986 and are expected to top $1 billion in 1999, he said.
CHS' closest competitor, publicly traded Naples, Fla.-based Health Management Associates, has 36 hospitals and reported about $1.14 billion in revenues last year.
"We haven't really tried to talk too much about what we're doing or how we're doing it," Smith said. "We've just been doing it . . . and we're getting good results."
CHS was founded in 1985. By the early 1990s, it was publicly traded. In 1996 Forstmann Little & Co., a New York private investment firm, bought it for $1.4 billion and took it private. In 1994, the company had nearly doubled in size, gaining 18 hospitals through the acquisition of Hallmark Healthcare of Atlanta.
When it bought CHS, Forstmann Little envisioned strong growth that would eventually take the company public again. Smith said CHS is waiting for the right market conditions to jump back into the fray.
"Our reason for going public again would be to access the public market in terms of dollars for capital," he said. "Whenever the hospital sector improves, we'll be looking for an opportunity to go public and access the capital markets."
Meanwhile, the company is free from annual growth targets, unlike some of its public counterparts.
"One of the nice things about being a private company is you don't have to meet public growth rates, so it gives us an opportunity to grow a little slower if we need to," Smith said.
As a private company, CHS has been able to grow and acquire without distractions, said Andrew Bhak, vice president of equity research at Morgan Stanley in New York.
"Clearly, in the industry environment today, given the (ups and downs) of the business on a quarter to quarter basis, I think it is a benefit being a private company, because you don't have to worry about short-term earnings shortfalls," he said. "You can focus more on the strategic aspects of the business in terms of building up earnings growth."
CHS' Smith said he thinks the pool of not-for-profit rural hospitals ripe for acquisition will not dry up soon. Furthermore, not-for-profits have shifted their attitudes in dealing with for-profits, he said. Rather than eying for-profit companies as hostile intruders, they are beginning to turn to for-profits as a source of capital.
Jerry Scott, the CEO of Northeastern Regional Hospital, said his hospital is in the early stages of courtship with CHS.
"It's access to capital that's the issue," he said. "What we're looking to do is build a new hospital, and we don't have the capabilities today."
Sale of the New Mexico hospital is contingent on CHS' willingness to build a new facility, he said.
Funding capital improvements, expanding services and recruiting physicians enable CHS to lure new hospitals into its fold, Smith said. The company is then able to increase efficiencies by standardizing processes.
So far, from Scott's side of the deal with CHS, the company looks like a good business partner.
"They're doing due diligence, and so are we," he said. "But at this stage, they look like a very excellent company to be working with."