In 1500, Portuguese explorers laid a claim to Brazil, now South America's largest nation.
Five hundred years later, a new wave of explorers--from U.S. investor-owned hospital chains--is seeking out opportunity in Brazil and other foreign lands.
Whether by helping to develop and build acute-care hospitals or by buying into foreign companies that own them, U.S. hospital chains are taking a renewed interest in ventures overseas. For some, operating hospitals in Europe or South America offers higher profit margins, an opportunity to tap into growing markets for private healthcare services, and the possibility of focusing on the most-profitable types of procedures. Though most American hospital companies will never shift the bulk of their operations overseas, some say foreign ventures provide a hedge against cyclical downturns in the industry at home and opportunities to gain footholds in growing markets abroad that are still in their infancy.
Quorum heads south of the border
Not many American hospital chief executives boast an undergraduate degree in geography, mastery of the Portuguese language and a two-year stint in the Peace Corps. But for Daniel Smigelski, that unusual background helped open some unexpected doors for him and his employer, Quorum Health Resources, the hospital management subsidiary of Quorum Health Group recently acquired by Triad Hospitals.
"You can find people who speak Portuguese, and you can find hospital administrators, but you can't find many hospital administrators who speak Portuguese," he says.
When Brazilian firms started calling Quorum in the mid-1990s asking for help in developing new hospitals, Smigelski was able to leverage his Portuguese language background and his experience as a hospital administrator in the U.S. to help expedite consulting contracts to assist companies considering buying private Brazilian hospitals. Although Quorum has not publicly touted its international activities, its reputation as the largest manager of not-for-profit hospitals in the U.S. drew the interest of several overseas investment firms looking for help in assessing acquisition opportunities. Quorum's involvement recently grew more substantial when it established a subsidiary, called Quorum do Brasil, in Brazil last March.
Smigelski, formerly a hospital administrator for Quorum-managed hospitals in Lake Village, Ark.; Moscow, Idaho; and Rolla, Mo., now splits his time between Brazil and Brentwood, Tenn., Quorum's home base. He's helping the company explore hospital development opportunities in the country where he spent his Peace Corps years in the early 1970s. Quorum has a team of about 20 management consulting professionals working on Brazil-related projects from Nashville and a staff of about 12 Brazilians in Sao Paolo.
Gerard Anderson, director of the Johns Hopkins Center for Hospital Finance and Management, says countries such as Brazil, Mexico and India could provide fertile soil for American hospital companies in coming years.
"Most affluent people buy into private hospitals," he says. "As the level of affluence grows in the more-developing countries, the market for for-profit hospitals is growing, and growing quite dramatically."
While all Brazilian citizens have the right to free medical care from the nation's public system, about 20% of its 172 million residents are served by the private sector through private health plans, company health plans and other arrangements.
"We're seeing them privatize their healthcare system more and more," Smigelski says.
Quorum's Brazilian subsidiary in Sao Paolo is working with a Brazilian partner called Grupo Fator to build three hospitals.
One 180-bed facility is planned for the regional trade center of Recife, a Brazilian city of about 2 million. The tertiary hospital, slated to open in January 2003, will offer organ transplants and other advanced procedures. Another hospital is being built in Salvador, a city of about 2.5 million people, based on a similar prototype of the Recife hospital. The 250-bed hospital will also have a diagnostic center and, like the Recife facility, will have medical office buildings attached, all scheduled to open in June 2003.
Quorum will manage both hospitals once they are finished, Smigelski says. The projected construction cost of these two hospitals, not including the land value, is $50 million. A third possible project in the Brazilian city of Rio de Janeiro that Quorum and Grupo Fator are working on together is expected to cost $40 million, says John Siedlecki, Quorum Health Resource's senior vice president of marketing.
Quorum do Brasil represents a relatively small portion of Quorum Health Resources' net operating revenue, which for the year ended June 30, 2000, was $142.4 million, or 8% of the net operating revenue of its parent, Quorum Health Group. Siedlecki declined to give specific revenue figures for the Brazilian projects, but he said he expects the foreign business, though now quite small, to grow over time.
"We are very optimistic at the growth prospects and consider it an organization that would be a significant contributing business unit for our company going forward," he says. "We would see the U.S. business remaining robust, but the Brazilian business would be a very strong growth platform."
Siedlecki says Quorum has received inquiries from France, Germany, Indonesia, Japan, Poland, Vietnam and several Latin American countries, but for now its focus remains on Brazil.
The old days
In the 1980s, before Quorum Health Resources was spun off into a separate company from former parent Hospital Corporation of America, the contract management business within HCA helped develop hospitals in China, France, the Philippines and Saudi Arabia, Siedlecki says.
Ronald Marston remembers the days when HCA was heavily involved in international opportunities in the 1970s. A founder of Health Care Corporation of America, Nashville, an international healthcare management consulting and staffing company, Marston directed the overseas arm of HCA, which in 1973 was awarded a contract to open and manage the King Faisal Specialist Hospital in Riyadh, Saudi Arabia. In one of the incestuous corporate spinoffs that characterize Nashville's healthcare community, the international subsidiary HCA formed to operate this hospital was Marston's current company's forerunner. In its heyday, HCA's international businesses included owning hospitals in Australia, Brazil, Panama and the United Kingdom, and managing hospitals in Italy, Pakistan, Saudi Arabia and Singapore.
Marston, who set up HCA's London office, stayed with HCA until 1989, when it sold its international unit and hospitals.
"It was sexy in some ways, having international operations, and in some ways it was negative," he recalls.
Part of the rationale in the 1970s, he says, was for companies to keep money offshore and reinvest it overseas to avoid U.S. taxes. On the downside, however, international operations took longer to set up and bring to profitability, and there were greater risks in dealing with countries with unstable political and financial situations and uncertain currency exchange issues, all of which could affect U.S. stock prices.
"If anything went wrong over there, it could have a negative effect on stock prices for no reason," he says, "so why do we want to go have those higher risks, greater exposures, and to probably get a smaller return?"
Among its recent projects, Marston's company, Health Care Corporation of America, had a two-year contract to manage a 300-bed tertiary-care hospital in a suburb of Kuala Lumpur, Malaysia, and it conducted a feasibility study for a 250-bed private tertiary hospital in a suburb of Manila, Philippines. The company also is proposing to develop a 100-bed medical-surgical hospital in Warsaw, Poland, the first of its kind in that country, according to Health Care Corporation of America.
During the late 1980s and early 1990s, companies such as Tenet Healthcare Corp. and predecessor American Medical International, Universal Health Services and HCA began to turn their attention inward. In 1995, Tenet closed its international business, selling hospitals in Singapore, Malaysia, Thailand and Australia. In 1991, Universal, based in King of Prussia, Pa., sold three hospitals it had operated in London for five years without a profit, choosing to deploy its resources closer to home. And HCA focused its overseas operations on London, forming a joint venture in 1995 with Britain's largest independent healthcare provider, General Healthcare Group, which had bought three hospitals from AMI.
The new targeted overseas model
Today's forays by for-profit hospital chains into international markets are more targeted, Marston says. Though the Columbia/HCA Healthcare Corp. of 1995 aimed to be a worldwide healthcare organization, its subsequent troubles with an ongoing government investigation and its resulting management overhaul shifted its focus to its "core markets."
But for HCA, London has become one of those core markets. And in recent years, the lure of overseas profits has once again reared its head and caused companies to take a second look.
"There is greater opportunity I think today than at any other time to go into some areas and make money on hospitals," Marston says.
Many governments are feeling the strain that their national health systems are putting on their budgets and are turning to the private sector to alleviate the pressure, he says.
"They're all struggling to come up with a way to take that burden off their back and put it somewhere else," he says. "They can't continue to put money into the public system, because it's not performing. They're great in terms of emergency systems, but they're not great in terms of customer service and promptness of service."
The current HCA-The Healthcare Co., which inherited a partnership in two-campus Wellington Hospital in London and Hopital de la Tour in Geneva, Switzerland, when its predecessor company bought Galen Health Care in 1993, has since built up its London presence again to become the dominant private acute-care provider in the London market. Last May, it bought out the interest of its joint venture partner, PPP Healthcare, an insurance company, in four of its London hospitals and then bought three more London hospitals from a subsidiary of the Kuwaiti government.
HCA's Geneva system is now the second-largest private healthcare group in Switzerland and includes a smaller hospital, 40-bed Clinique de Carouge, an outpatient facility called Centre Medical de Merin and a sports injury clinic, Sports Multitherapies S. Pidancet. HCA's hospitals in both London and Geneva specialize in cardiac care, oncology, obstetrics, neurosurgery and ophthalmology, which are relatively high-margin services.
John Kausch, president and chief executive officer of HCA International, a wholly owned subsidiary of HCA in the United Kingdom, says the annual revenue for HCA's international operations are $350 million to $400 million. Of the roughly 60 private hospitals in London, HCA's represent about 23% of the beds. About 11% to 12% of the population in the U.K., or about 8 million people, have private health insurance, and the private sector represents about 20% of the total services provided.
"The people we see in our hospitals are people that have something wrong with them and they do not want to wait," Kausch says. "They don't want to wait for their care or they want to have more of a say in choosing their consultant."
Generally, he says, they are from higher socioeconomic backgrounds because they can afford to pay for their own care or have private insurance so they can receive care more quickly or in private rooms, which the HCA hospitals offer. Most of the services HCA hospitals provide are elective, nonemergency services, including cardiology, orthopedic surgery and gastroenterology. Because the U.K.'s National Health Service (NHS) has extensive emergency and trauma departments and because private insurance generally doesn't pay for emergency services, HCA hospitals do not have emergency departments. One of the fastest-growing sources of revenue at the HCA facilities abroad comes from people paying for their care out-of-pocket. They represent 20% to 25% of patients at the HCA hospitals, Kausch says.
Late last year, predicting a winter crisis that has in years past filled state-funded British hospitals to capacity, Prime Minister Tony Blair's government signed a "concordat" with the private healthcare sector, agreeing to allow NHS-funded patients to receive treatment at private facilities.
Kausch says this agreement bodes well for the future profitability of HCA's and other private hospitals.
"Since (last) November, we've had a dramatic increase in the willingness of (NHS) executives to contract with our hospitals to serve NHS patients in our hospitals," he says. "It certainly has a positive impact on our revenue."
The U.K. isn't the only foreign market that American hospital companies have decided to explore.
Tenet operates a hospital in Barcelona, Spain, called Centro Medico Teknon, which, according to spokesman Harry Anderson, took years to turn a profit but now is a "very successful operation" specializing in cancer care and cardiac services.
Spain was a country that was coming out of a long period of dictatorship into democracy. "There was a rising middle class with an increasing amount spent on healthcare, and a crying need to serve that growing portion of the market that had rising incomes and wanted better treatment than you could get in public clinics," he says.
Last month, Universal Health Services disclosed that it had bought an 80% interest in France's fourth-largest private acute-care hospital operator, Sante Finance, for $75 million. The venture, called Medi-Partenaires, is still so new that Kirk Gorman, UHS' chief financial officer, is loath to make any sweeping comments on its prospects. But he says that UHS' international venture in Europe may provide some welcome diversification.
"We think the U.S. acute-care business is the best big business we know of," he says, "but even the best business does have problems now and again, whether it be (the Balanced Budget Act of 1997) or anything else."
The same goals that prompted UHS to expand into the behavioral health business in the U.S. drove the company to explore the opportunity in France, Gorman says.
"We were thinking about ways to provide a little more balance through diversification for the company," he says.
Nashville goes global
There is more and more of an organized network for hospital companies in the U.S. seeking opportunities abroad. In the healthcare hub of Nashville, for instance, the Nashville Health Care Council, an organization that brings together the market's healthcare executives, is organizing its third trade mission to Europe. The council was the link that brought Grupo Fator to Quorum Health Resources. Matthew Gallivan, the council's executive director, believes the upcoming trip to Belgium and Italy, scheduled for November 2001, could bring more Nashville companies into contact with European opportunities.
HCA's Kausch says his chain's London hospitals provide profit margins that are a percentage or two higher than HCA's American hospitals, and Gallivan says the challenges--which can be longer time horizons to turn a profit in foreign countries--often are worth the wait.
Clearly Nashville's healthcare community agrees, if participation in the trade missions is any gauge. So far, 20 to 30 senior-level healthcare executives are expected to participate in the November trip, which will be led by HCA President and CEO Jack Bovender.