Pennsylvania, historically a stronghold of not-for-profit healthcare, is fast becoming a popular roosting spot for national, for-profit hospital companies.
Up until 1998, only one or two of the acute-care hospitals in the Keystone State were for-profit, and none of them belonged to national chains. Today, for-profit companies own 11 of the state's 210 acute-care facilities, and several deals are pending that could cause that number to rise.
In addition to its bucolic countryside, Pennsylvania may be attractive to for-profit chains-and for-profits may be attractive to Pennsylvania--for several reasons. Unlike the Southeast, where for-profit healthcare has been entrenched for years, Pennsylvania has not yet been mined by companies in search of rewarding acquisition deals.
Another reason is cash. Many Pennsylvania hospitals need it, and for-profit chains have it.
Carlisle (Pa.) Hospital is just one example. Carlisle Hospital and Health Services, the not-for-profit parent of the 166-bed hospital, sent 25 requests for proposals to potential buyers last fall. The hospital needed to be replaced, and that was the board's primary goal. On Jan. 8, Carlisle entered exclusive negotiations to sell the hospital to Health Management Associates, a for-profit chain based in Naples, Fla. The deal is expected to be completed within 90 days. In its proposal, HMA agreed to build a $55 million replacement hospital south of Carlisle, which lies just west of Harrisburg, the state's capital.
HMA's current negotiations would bring the system's total number of hospitals in Pennsylvania to three. It already owns two of the three hospitals in Lancaster. HMA bought 142-bed Community Hospital of Lancaster in July 1999 for $15 million with a promise to build a new hospital, and it bought 208-bed St. Joseph's Hospital, also in Lancaster, in July 2000 for about
Cindy Small, a spokeswoman for Carlisle Hospital and Health Services, said the system was interested in considering only offers that included a proposal to finance a new facility. The organization received four offers from for-profit companies and one from a not-for-profit, she said.
"But that nonprofit-and this was a key element for us-was not interested in building a new hospital," she said. "It was very important to us to build a new hospital."
Howard Peterson, managing partner at TRG Healthcare, a hospital management and consulting firm with offices in Philadelphia, is working to help 233-bed Easton (Pa.) Hospital look for a "strategic capital partner." So far the hospital has received six proposals, from both for-profit and not-for-profit companies.
Peterson said he believes for-profit companies see Pennsylvania as a promising growth region because its hospitals have not yet done as much tough cost-cutting as hospitals in other areas of the country, such as California.
"There's more opportunity to make improvements in institutional performance," he said.
Some of the larger chains also have experience with managed-care companies and in acquiring hospitals.
"National not-for-profits respond only if there's a local circumstance that makes sense," Peterson said. "For-profits go to new markets all the time."
Nancy Bell, vice president of healthcare finance and insurance at the Hospital and Healthsystem Association of Pennsylvania, said access to capital is one reason for the recent spate of hospital conversions.
"Pennsylvania has a lot of strong, community-based hospitals, in that they have a lot of loyalty, they've got good patient bases; however they've run into situations in their communities where they've had difficulty accessing capital," she said. "The for-profits have the access, since they can go to the capital markets in a different way than the not-for-profits; they can bring the money in to do the renovations."
The first major hospital chain to break into Pennsylvania was Tenet Healthcare Corp., Santa Barbara, Calif. In November 1998, Tenet bought eight hospitals at a bankruptcy auction from Allegheny Health, Education and Research Foundation. It has since closed one of those hospitals.
Community Health Systems, a Brentwood, Tenn.-based rural hospital chain, was another for-profit pioneer in Pennsylvania, purchasing Berwick (Pa.) Hospital Center and its nursing home in March 1999. The $49 million transaction included a pledge from CHS to pay
$34 million to a charitable foundation and to make $15 million in capital improvements over eight years.
A CHS official and a spokeswoman would not respond to requests to discuss the company's plans in Pennsylvania, but a source who asked for anonymity said CHS had outbid Universal Health Services, whose home base is King of Prussia, Pa., for 176-bed Brandywine Hospital in Coatesville. John Lines, a spokesman for the hospital, declined to confirm whether CHS was negotiating to buy the hospital. He said, however, that in early 2000, Brandywine's directors began examining the possibility of partnering with another system because of an increasingly competitive market and recent net losses.