Some of the largest and most visible for-profit hospital companies have been trimming the fat this year, dumping hospitals that are unprofitable or don't fit their geographic or strategic models.
Columbia/HCA Healthcare Corp. sold enough hospitals to create two new publicly traded companies in May, and Tenet Healthcare Corp. is announcing the sales of 20 hospitals that were earmarked because they did not meet the company's strategic goals.
But one hospital company, Paracelsus Healthcare Corp. of Houston, has no more fat and is trimming the lean part of its portfolio. The company has taken the dramatic step of planning to divest a significant number of strategically important hospitals. Unlike Columbia and Tenet, however, this much-smaller company will divest to stave off creditors, not to impress investors.
Paracelsus recently announced it will sell five core hospitals to try to reduce its considerable debt load. The buyer is Iasis Healthcare Corp., a Nashville start-up that also has agreed to buy 10 hospitals from Tenet (Aug. 23, p. 2). Iasis will pay $280 million for a majority interest in five Paracelsus hospitals in Utah: Davis Hospital and Medical Center in Layton, Jordan Valley Hospital in West Jordan, shuttered Paracelsus Regional Hospital in Salt Lake City, and Pioneer Valley Hospital and Salt Lake Regional Hospital and Medical Center, also in Salt Lake City.
In its 1998 annual report, Paracelsus defined its core market using the Salt Lake City hospitals as examples. The core facilities are "hospitals that are No. 1 or 2 in demographically attractive markets of approximately 30,000 to 500,000 population or larger markets," the report stated.
Salt Lake City is, by some measures, Paracelsus' largest market. It accounts for 38% of the company's earnings from existing facilities before interest, taxes, depreciation and amortization, according to the report. EBITDA measures the cash a hospital generates.
The 1998 annual report also noted that the company expected to maintain profitability in Salt Lake City.
In its quarterly report filed with the Securities and Exchange Commission, Paracelsus disclosed that its long-term debt as a percent of total capitalization had increased 1.7% to 95.5% as of June 30 from 93.9% in December 1998. The increase resulted from net losses the company recorded and net borrowings under its senior credit facilities.
Paracelsus officials have conceded that the company's debt-to capitalization ratio is alarmingly high. The average for hospital companies is about 68%, says Sheryl Skolnick, an analyst with BancBoston Robertson Stephens in New York. She says comfortably leveraged companies average 50% to 60%.
"This transaction is an attractive multiple, which allows us to recapitalize our company," says Deborah Frankovich, senior vice president and treasurer of Paracelsus.
Under the deal, announced in mid-August, Paracelsus will maintain a 6% interest in a subsidiary that will own the hospitals, and it will still have some cash to spare.
During a conference call announcing the deal, Paracelsus officials estimated that the sale would allow the company to retire its entire senior credit facility and would leave Paracelsus with more than $50 million to be used for capital investments in its remaining hospitals.
"This transaction is for the banks, not the shareholders," says Deborah Lawson, healthcare analyst at Salomon Smith Barney. "I do not see this transaction as one that enhances the visibility of Paracelsus in the eyes of Wall Street. In fact, it fairly diminishes Paracelsus as a player in the publicly traded hospital arena."
Paracelsus had retained investment bank Chase Securities to help it review its options, including looking for a buyer for the whole company.
Frankovich declines to say whether such a sale is still an option, but she says there are no plans to sell more core hospitals.
The company has been trying to get its house in order. It recently announced that the U.S. District Court for the Southern District of Texas has approved a settlement of class-action lawsuits arising from Paracelsus' merger with Champion Healthcare Corp. in 1996.
In the first six months of 1999, Paracelsus recorded a $2.2 million charge related to executive agreements with some of the company's former and current officers, and a $5.5 million corporate restructuring charge. The latter was part of an effort to reduce corporate overhead and included $2.2 million in employee severance.
Before it announced the Utah sale, Paracelsus disclosed that it was trying to sell four noncore hospitals-one in Georgia, one in Mississippi and two in Tennessee. Since the agreement was announced in May, the exclusivity of the deal has expired. Paracelsus says it is evaluating the sale of those hospitals and will likely close one of the facilities, 52-bed Senatobia (Miss.) Community Hospital. A. Ronald Turner, who started the company Associated Healthcare Systems to buy the hospitals, says he is still interested in following through with the deal once he secures financing.
"They have had to do a lot of restructuring, a lot of rethinking and a lot of restaffing of their business over time," Skolnick says. "They're trying to keep (the company) alive, and those are exactly the kinds of actions you'd expect them to take."