Iasis Healthcare Corp. last week went from being an obscure, year-old Nashville company without any hospitals to a significant hospital owner by announcing two separate deals to buy 15 hospitals.
With equity backing from New York investment firm Joseph Littlejohn & Levy, Iasis is buying 10 hospitals from Tenet Healthcare Corp. and five from Paracelsus Healthcare Corp. for a total of about $800 million.
For the hospitals involved, the emergence of Iasis onto the for-profit hospital scene is just the latest in a series of ownership changes (See chart, p. 12).
In fact, some of the hospitals have changed hands so many times that employees have come to expect periodic shifts in management, benefit plans and policies.
Jordan Valley Hospital, for example, one of five hospitals in Utah's Salt Lake City area that Iasis is buying from Paracelsus, went through five owners in two years in a string of sales and mergers.
Built in 1983, Jordan Valley was owned by the Sisters of the Holy Cross in South Bend, Ind., until 1994, when it was sold to Healthtrust. It became a Columbia/HCA Healthcare Corp. hospital in 1995 through Columbia's merger with Healthtrust. Columbia sold it to Champion Healthcare Corp. in 1996, and it became a Paracelsus hospital later that year when Paracelsus merged with Champion.
"We're a really strong hospital, and that really carried us through a lot of the transitioning," said Charlene Edmunds, director of community relations. "I think the nature of the industry has changed, but I'm really hopeful that because (Iasis) is a new company, that they are going to want to stay with us for a long time."
That is what Iasis would like to do, said spokeswoman Paula Lovell. Lovell said the intention of President and Chief Executive Officer Wayne Gower is to manage the hospitals and "grow them into community assets."
But for-profit hospital companies' obligation to increase profits has led to greater management instability at those hospitals compared with not-for-profit hospitals, a recent study commissioned by the American Association of Retired Persons concluded (Aug. 9, p. 16).
"The for-profit world is very dynamic in its ownership, in acquiring," said Deborah Chollet, vice president of the Alpha Center, the Washington-based not-for-profit healthcare research and policy firm that conducted the AARP study. "It's growth that Wall Street rewards, and growth in this industry has occurred historically and is likely to continue to occur by acquisition-not by holding a business and growing it in place, but by acquisition."
Iasis received roughly $200 million in equity capital from Joseph Littlejohn to pursue the two deals, which are expected to close in October or November. The rest of the financing is in the form of bank debt and subordinated debt. Iasis is paying roughly $280 million to Paracelsus for its hospitals; Paracelsus will retain a 6% interest.
The cost of the Tenet deal was reportedly as much as $520 million, for which Iasis acquired 10 hospitals in Arizona, Florida, and Texas. Four hospitals were those Tenet inherited when it bought OrNda HealthCorp in 1997, five belonged to American Medical International and one belonged to National Medical Enterprises, which merged with AMI to form Tenet in 1995.
Tenet, with the help of Merrill Lynch & Co., is trying to sell a total of 20 hospitals. Only one other sale has been announced so far, that of Columbia (Mo.) Regional Hospital to the University of Missouri (July 26, p. 4).
Unlike many other Nashville-based start-up hospital companies, Iasis is shunning rural markets and targeting growing midsized markets with populations of 100,000 or more, where there aren't as many buyers.
"The niche out there that's not getting filled is the midrange hospitals, with 100 to 250 beds," Gower said.
The Salt Lake City market was attractive to Iasis because of its current population growth, he said. With its acquisitions, Iasis plans to increase operational efficiencies and recruit new physicians, he said.
The plan had enough promise to lure Joseph Littlejohn, which at one time also backed OrNda and was purchased by Tenet in 1997.
"We recognize the industry right now is out of favor and is currently trading at a considerable discount," said Jeffrey Lightcap, senior managing director at Joseph Littlejohn. "So we think we're buying at the right time, and we think this mix of assets gives us critical mass."
Prior to forming Iasis, Gower had been president of Columbia's southeastern division, where he was responsible for 22 hospitals with net revenues of more than $1 billion. These hospitals were subsequently sold for $1.2 billion to a not-for-profit consortium of buyers toward the end of 1998.
Gower would not comment on whether the company will pursue a physician syndicate ownership strategy, which Iasis executives had articulated to potential investors when shopping around for equity (July 9, p. 9). Both the company's strategy and management team are evolving, he said.
Gower said the hospitals Iasis is buying are profitable as a group.
All but three turned a profit in the most recent years for which data were available from HCIA, a Baltimore-based healthcare information company. The three that reported a net loss were Town and Country Hospital, in Tampa, Fla., which lost $526,183 in 1997, the last year for which data were available; Salt Lake Regional Medical Center, in Salt Lake City, which lost $129,851 in fiscal 1998; and Pioneer Valley Hospital, also in Salt Lake City, which lost $1.4 million in fiscal 1998.
Community Health Corp., a Texas-based consortium that seeks to prevent for-profit companies from buying not-for-profit hospitals, lost out on a bid for two of the Texas hospitals that Iasis is buying: Mid-Jefferson Hospital in Nederland, and Park Place Medical Center in Port Arthur.
A source close to the negotiations said Vanguard Health Systems had put in an unsuccessful bid for the Phoenix-area hospitals in the Iasis deal.
Tenet spokesman Harry Anderson would confirm only that there have been multiple bidders for each hospital the company is trying to sell.