The sound of jackhammers and forklifts is filling the air in small communities around the country as for-profit hospital chains work to reincarnate aging hospitals they have bought, turning them into state-of-the-art facilities.
In many instances, for-profit chains have cast themselves as the saviors of community healthcare, saving from extinction hospitals that otherwise could not afford necessary modernization. But the national chains also are counting on community hospitals for the kind of quick volume gains and revenue growth that already have been wrung out of their other hospitals.
While not-for-profit hospitals continue to feel the effects of credit-rating downgrades and limited cash availability, their for-profit counterparts are sounding more and more bullish about acquisition. Flush with buying power from stock offerings or new credit facilities, the for-profit urban providers are stepping up their hospital purchases. At the same time, rural chains are making pitches to communities with outdated hospitals, telling city and county councils that if they allow a for-profit to build it, patients will come.
The rural story
Robert Butler, who has been the mayor of Marion, Ill., for more than 40 years, was on the receiving end of one of those sales pitches in 1996, when his city (population 15,600) was looking at options for its hospital, built in the early 1950s. As he sees it, selling the city hospital to a for-profit company was not a complicated decision.
"Where would the city of Marion get $40 million to build a new hospital?" he says. "We'd have to go into debt from now until hell freezes over and not worry about where the money comes from to pay it off."
Alan Morgan, vice president of government affairs and policy for the National Rural Health Association, says he does not know how many rural hospitals have been similarly tempted, but he acknowledges that rural hospitals everywhere are facing lean financial times.
Many such hospitals blossomed shortly after World War II, in a construction spree spurred by the 1946 Hill-Burton Act, which provided federal funding for construction of community hospitals. Many of these facilities are now half a century old.
"Capital is a real issue for rural hospitals," Morgan says. "I would expect you'd see a lot of play in that area between nonprofits and for-profits."
At the time Marion went looking for buyers, numerous companies responded to the call, but only one offered to build a new tertiary-care facility. Community Health Systems, Brentwood, Tenn., a for-profit chain and the nation's largest rural hospital company, won the bid by offering to build a replacement hospital that would include services such as open-heart surgery, cardiac catheterization and magnetic resonance imaging.
"We'd had people who had to travel anywhere from 80 to 180 miles for bypass surgery, for cardiac procedures and other complicated types of surgical procedures," Butler says, "and we felt people here were entitled to have that type of service available locally."
Competition for the hospital was intense, and within a day of the city's receipt of CHS' bid, HCA-The Healthcare Co.--at the time called Columbia/HCA Healthcare Corp.--came back with an offer to build a new hospital. But Marion's local officials had grown comfortable with CHS, which agreed to pay the city $11 million to lease the hospital until a new one was completed.
L.C. Cavaness, who is on the hospital's board and was chairman when CHS came to town, says the issue came down to the community's need to balance its expenses.
"For us to look at a $40 million to $60 million bond issue, for a town of 15,000 with all the other basic needs, we thought it was just a little out of their reach," he says. "That was one of the determining factors."
City and hospital officials took the proposal to the community through town meetings and offered people a chance to vote. Cavaness says 80% voted in favor of selling the hospital to CHS.
"When you start spending somebody else's money and it doesn't come back as a charge against somebody else's taxes, it's more readily sellable," he says.
From CHS' perspective, demographics always drive the decision to build a new replacement facility or to buy in a given market. A growing population combined with low volume at an undercapitalized hospital often are good signs that investor-owned chains can turn things around with the proper cash infusion, the company argues.
Robert Hardison, CHS' senior vice president of acquisitions and development, says the company often will focus on improving outpatient services and emergency rooms, because many patients enter the system through those areas. Many aging rural hospitals were built when inpatient stays were longer and more common, and therefore they often have a much greater emphasis on inpatient space than is needed today.
"We're very conservative and careful in what we do," Hardison says. Through market research, demographic studies, and construction and design cost estimates, the company has a good idea of what its return is likely to be, he says.
To build hospitals with 40 to 100 beds, CHS uses a prototype design, and the company works with the communities and local physicians to adapt the blueprint to their needs. Based on its recent acquisition deals, CHS is obligated to build four replacement hospitals through 2005, one of which is the Marion facility.
Ground was broken last November on the new 300,000-square-foot facility, which is to include expanded cardiac treatment facilities and an adjoining office building for 30 physicians. It is scheduled to open in summer 2002 under a new name, Heartland Regional Medical Center-Marion, a word play on both the region and the services to be provided.
Ronald Seal, chief executive officer at Marion Memorial, says the hospital, which was profitable when CHS began leasing it, is in a much stronger financial position today, although he declines to provide specific financial figures. So far, CHS has recruited 35 physicians to the hospital in anticipation of the new facility's services and opportunities. Admissions have grown 31% in four years, surgical volumes have increased 68%, emergency room volume has risen 10% and outpatient volumes have jumped 25%. That has translated into a revenue increase of 74% in four years, he says.
It is this kind of revenue impact that drives many of the for-profit companies to invest in these markets.
Province Healthcare Co., Brentwood, Tenn., a 15-hospital rural chain, is also working on at least one replacement hospital, 50-bed Elko (Nev.) General Hospital, which is expected to be completed in September.
At a February investor conference in New York, Martin Rash, Province's chairman, president and CEO, highlighted the Elko project as well as several hospital expansions, noting that Province expects to invest $60 million this year on capital expenditures, in addition to whatever it may spend on acquisitions.
About 1,500 community not-for-profit hospitals meet Province's acquisition criteria, he says, and there are 10 to 15 hospitals in the company's acquisition pipeline. Province buys hospitals only in growing areas, where it expects to be able to bring market share levels up from 30% to 70% within seven years.
Merilyn Herbert, vice president of investor relations at Province, says many of the not-for-profit hospitals Province looks at are caught in a downward spiral that is hard to escape without selling the facility. Once a community begins to neglect its hospital and fails to update equipment, physicians leave and patients soon follow. If a hospital can show it is worth replacing by meeting certain profitability targets, she says, Province will invest the needed capital.
Province bought five hospitals in 1999 and two hospitals last year. It expects to buy from two to four this year. Rash said at the February investor conference that acquisitions are likely to accelerate this year because of a backlog from last year's elections. Now that elections are over, he said, local officials may be more inclined to make what could be a politically unpopular pitch to sell a community-owned hospital that has been a drag on local coffers to a for-profit company.
Health Management Associates, a rural chain based in Naples, Fla., considers itself an expert in buying and rebuilding. In the past three years, it has built five replacement facilities for hospitals it had bought. HMA is obligated to build at least one more, to replace 142-bed Community Hospital of Lancaster (Pa.), as part of its purchase deal, and is likely to also rebuild 91-bed Brooksville (Fla.) Regional Hospital, says John Merriwether, director of financial relations for the company.
One of the reasons chains will build a new hospital is to move a facility from a landlocked or downtown location to one that is more visible, in a growing area, or near a highway.
That was part of the decision in Marion, where the CHS hospital will move from downtown to near the interstate, and also in the case of HMA's Lake Norman Regional Medical Center, in Mooresville, N.C., which the company moved from downtown to Interstate 77 and opened in June 1999.
Between then and June 2000, volumes increased at least 30%, according to the company. The proximity to the highway has brought more patients from nearby areas who would not have gone to the hospital's old location.
Joseph Vumbacco, HMA's CEO, also has a construction background. Before joining HMA, he was the executive vice president of Turner Construction Co., which has built many healthcare facilities across the country. He believes that background has helped the company build new facilities efficiently and quickly.
"I think there will continue to be situations in which an acquisition will involve a replacement hospital," Vumbacco says. "There are many situations in which the community has already made that determination, and they're looking for companies that have the capital available."
Other for-profit companies also are touting their access to capital as they scout out new acquisition opportunities. In the larger and more urban markets, industry heavyweights Tenet Healthcare Corp., of Santa Barbara, Calif., and HCA-The Healthcare Co., Nashville, have begun making strategic hospital purchases.
"It is a fact that basically from 1998 to fairly recently, we just weren't in the market," says Harry Anderson, a Tenet spokesman, adding, "There has been a significant increase in the last year in the number of potential opportunities for us."
Anderson says the acquisition climate is "the strongest it's been in five years."
Many community hospitals are in consolidation mode, he says, meaning they are open to joining networks to gain leverage with managed-care companies and to gain access to capital, a trend that benefits the larger for-profit chains such as HCA and Tenet.
Sound familiar? That's the same tune the larger hospital chains were singing in the early 1990s.
Healthcare analyst Robert Mains of brokerage firm Advest, in Hartford, Conn., says the last time for-profit hospital chains were this openly aggressive about acquisitions was in the mid-1990s, before industry giant HCA was hit with a federal fraud investigation that caused it to scale back its pursuit of hospitals.
Since it bought eight Philadelphia-area hospitals out of bankruptcy in 1998 from the Allegheny Health, Education and Research Foundation, Tenet has made only one small hospital acquisition in Texas.
But already this year, Tenet has announced four potential hospital purchases, one in Easton, Pa.; another in East Point, Ga.; and two-hospital Intracoastal Health Systems, based in West Palm Beach, Fla. All are in the early stages of negotiations, and the company could announce more as the year goes on, Anderson says.
HCA, the largest for-profit chain with about 200 hospitals, also has just begun a strategic acquisition effort, after several years of spinning off and selling more than 100 hospitals. In February, HCA announced plans to buy a hospital in Richmond, Va., from HealthSouth Corp., and it also made an unsuccessful bid on the Intracoastal hospitals. The company is focusing on acquisitions in its existing markets, company officials have said.
These and the other publicly traded hospital companies have benefited in the past year from rapidly increasing stock prices that have enhanced their access to capital.
Although in recent weeks they have suffered along with the rest of the stock market from volatile swings, many analysts believe the current economic uncertainty could ultimately benefit hospital companies, which are often seen as a safer investment in times of recession.
In the meantime, Tenet's and other companies' stock prices have nearly doubled in the past year. This stock strength has afforded investor-owned hospital companies ample opportunities to build up their cash reserves through stock offerings, bond issues or new credit facilities.
Santa Barbara, Calif.-based Tenet, for example, recently obtained a new $2 billion credit facility, and HCA earlier this year sold $500 million of speculative-grade bonds. HCA spinoff LifePoint Hospitals, Brentwood, Tenn., raised at least $100 million in a March stock offering, while CHS completed an initial and secondary stock offering last year, raising $514 million.
Province earlier this year sold $150 million in convertible subordinated notes, after offering 4.2 million new shares last year and going through a 3-for-2 stock split.
Stephen Monroe, a partner at Irving Levin Associates, a New Canaan, Conn.-based firm that tracks merger and acquisition activity, says the growing disparity between the ability of for-profits and not-for-profits to access capital has fueled the recent uptick in acquisitions.
"The for-profit chains seem to be doing quite well, their stock prices are doing quite well and their ability to attract capital has increased over the past 12 to 18 months," Monroe says. Only a major economic development such as a stock market crash could derail this latest acquisition movement, he says.