Despite more vigorous trade between the U.S. and Mexico, the border between their healthcare systems has stood fast. A few U.S. hospital operators have dipped their toes into Mexican markets by forming loose affiliations with physicians and hospitals, typically with a limited goal of generating referrals.
But Christus Health, a large Roman Catholic system based in Irving, Texas, has truly crashed through the divide. In April, it bought 51% of Hospital Muguerza, one of a handful of private hospitals in the prosperous northern Mexican state of Nuevo Leon. It could be the first time an American company owns hospitals in both the U.S. and Mexico.
Though novel, the cross-border arrangement makes sense on many levels. Christus and Muguerza share a Roman Catholic mission. Moreover, Christus viewed the acquisition, whose value has not been disclosed, as a natural extension of its service area. Nine of the system's 24 acute-care hospitals are in the south Texas markets of Corpus Christi and San Antonio. Hospital Muguerza consists of a 178-bed hospital in Monterrey, Mexico, and a smaller sister hospital in nearby Saltillo.
Christus has been seeking out international ventures that would complement its not-for-profit mission as well as its balance sheet, and last year it completed guidelines for the types of deals it would pursue. "It seems appropriate that the world's becoming global, and that opportunities to grow will be international rather than in the United States," says Christus President and Chief Executive Officer Thomas Royer, M.D.
Muguerza is expected to generate an operating margin of 5% to 8% in the current fiscal year, which ends June 30, 2002, says John Zipprich, Christus' general counsel, who serves on the executive committee of the new Mexican corporation. "That would be better than most of our other facilities," he says.
If Christus succeeds in bridging the cultural and economic divide, it could serve as a model for other U.S. healthcare providers that operate near the Mexican border.
Lawrence Meagher Jr., president and CEO of International Hospital Corp., a Dallas-based company that owns and operates two highly profitable hospitals in Mexico, says there is "ample opportunity" for U.S. providers south of the border. His company's hospitals are affiliated with Baylor University Medical Center in Dallas.
Over the years, U.S. hospital operators have rejected the establishment of Mexican subsidiaries because of barriers such as the dominance of Mexico's socialist healthcare system, clinical and demographic differences including the country's comparatively young population, a scarcity of developable land, difficulty in obtaining debt financing, and uncertainty about the quality and cost of construction, Meagher says. Two San Diego-based not-for-profit systems, Scripps Health and Sharp HealthCare, separately announced plans to operate hospitals in Mexico in the mid-1990s, but their plans never materialized.
The North American Free Trade Agreement has expanded private health benefits in Mexico and fostered collaboration between providers in both countries. While the flow of patients used to be northward, more U.S. residents are beginning to seek care in Mexico for cultural and economic reasons, says Meagher, whose company is building a third hospital in Mexico and negotiating to buy two more. "As people appreciate that there is good quality of care in Mexico as well as cultural reasons for going there, I think people will prefer to get care that way," he says.
A white knight
Yet the cross-border marriage of Christus and Muguerza was not the product of some grand strategy to create an international network. Rather, it was the result of a scheme to save a family's legacy from a possible hostile takeover by a deep-pocketed hospital chain in Mexico City.
Since it was founded in 1934, the Muguerza hospital had been owned and controlled by the family of its founder, Jose Muguerza. It never paid dividends, investing all profits in equipment and services. The hospital sold some stock to local physicians during a bumpy financial period in the 1970s. Last year, those physicians and a few family members sold their shares to an investor-owned chain called Grupo Angeles.
Some of the remaining family shareholders feared that the new investor, which had accumulated nearly half the stock, would not support the hospital's not-for-profit tradition. Grupo Angeles is owned by a member of the politically connected V zquez RaÃ±a family, which includes media magnate Mario V zquez RaÃ±a, who until recently was head of the Mexican Olympic committee. Grupo Angeles' public relations firm in Mexico did not respond to a request for comment.
The Muguerza family desperately needed capital to buy back the chain's equity. Secretly, they called on Christus.
Christus was an obvious choice for white knight. Members of the Sisters of Charity of the Incarnate Word of San Antonio, one of the sponsors of Christus, worked at Muguerza. A member of the congregation forwarded a letter to Royer from Fernando Ferrera Rivera, a Monterrey businessman and one of two family members involved in the hospital's operations.
Ferrera Rivera, a devout student of the philosophy of Mahatma Ghandi who describes himself as a sort of family guard dog, set up an appointment with Royer in July 2000. The appointment was supposed to be by phone, but Ferrera Rivera showed up at Royer's office near Dallas, determined to press his case in person. At that meeting, Ferrera Rivera says he asked not only that Christus purchase equity but that it also take permanent control. "I told (Royer) that we need somebody morally, ethically, to run the hospital for the future," he says.
The two men talked for about an hour and a half. Immediately, they say, they found common ground. In fact, Muguerza officials were so eager to make a deal that when Christus officials arrived in Mexico-even before a letter of intent was signed-there were about 40 boxes of documents sitting there to help them perform due diligence. Both sides were so comfortable that they likened it to formalizing an arrangement that had existed for years.
Dealing with details
To structure the deal, Christus had to make some concessions to Mexican law and culture. Hammering out an agreement required about 25 trips across the border on both sides, Royer says, because Christus officials wanted to accommodate the Mexican tradition of doing business face to face.
Christus sought advance government approval for the name of the new corporation, Christus Muguerza, and it excluded the name of Jesus Christ from the official mission statement, Zipprich says. Mexican lawyers advised Christus that religious references might not be acceptable to Mexican authorities.
Because the family was accustomed to monthly board meetings, where most big decisions would be made, Christus had to push for the creation of an executive committee that would be entrusted to make routine decisions. Under the new structure, the hospital is governed by a 12-member board that will meet about once per quarter. All but five of the board members live outside of Nuevo Leon.
Although Christus owns 51%, it shares governance equally with the Muguerza family. Christus and the family will take turns selecting a president, who will serve a one-year term. However, Christus has sole authority over the selection of a general director, a key operations post. Ferrera Rivera is under contract to serve as general director until at least April 2003.
"Family involvement was critical to the ongoing success of the hospital," Zipprich says.
Financially, the hospital has an entirely different structure than Christus facilities in the U.S., which are legally incorporated as not-for-profit organizations and do not pay taxes. In Mexico, converting a stock company to a tax-exempt would be difficult, Zipprich says, although Christus Muguerza is seeking tax-exempt status for a subsidized clinic that it opened in a poor neighborhood of Monterrey in July. Seeking tax exemption for the hospitals "may be something we'll look at, but it's not on the drawing board now," Zipprich says
What Christus gets
Christus facilities in the U.S. could benefit from the deal in several ways. The system's hospitals in south Texas plan to share clinical ideas and best practices with Muguerza, which is among the most technologically advanced hospitals in Mexico. For example, Christus hospitals could learn from Muguerza's advanced cardiac and eye programs, Royer says.
U.S. hospitals also may be able to recruit graduates of Muguerza's nursing school, which opened last year. The school expects to graduate 30 students in its first class in 2003. Unlike the U.S., Mexico doesn't have a nursing shortage, according to Muguerza officials.
Further, Muguerza could offer a growth opportunity for the Christus system that is an alternative to the overbedded U.S. market. Muguerza officials at the Saltillo facility say they hope to build new hospitals in the area in a few years, possibly with funding from Christus, a possibility Royer acknowledges.
Muguerza is poised to serve growing middle and upper classes that are hungry for services and increasingly able to pay to obtain better quality care and to avoid long lines at government-run facilities for services such as cardiac catheterizations. All Muguerza physicians are board-certified, some by U.S.-based organizations. In an initiative started before Christus' purchase, the hospital is gearing up to seek accreditation from the U.S.-based Joint Commission on Accreditation of Healthcare Organizations. If it succeeds, it would be the first Mexican hospital to win that designation. The JCAHO has been trying to accredit foreign hospitals, notably in Spain (Nov. 13, 2000, p. 28).
Christus and Hospital Muguerza declined to release the purchase price for Christus' 51% share in the system. However, Muguerza officials, including Ferrera Rivera, indicated that it falls somewhere from $10 million to $20 million. Christus has annual revenue of about $2.2 billion.
Royer, a veteran of Geisinger Medical Center in Danville, Pa., and Henry Ford Health System in Detroit, says the biggest risk for his system is overcoming cultural differences. But he says Christus leaders are "highly motivated" to accommodate Mexican culture and language. Royer, who didn't speak a lick of Spanish before the transaction, managed to give his speech in Spanish to Muguerza employees in July.
The stability of the Mexican economy presents another risk, he acknowledges. But he notes that the U.S. economy has displayed "fragility" in its recent downturn. "I think we're comfortable the political situation is moving in the right direction," he says.