When the big boys have come calling, Gregory Britton has resisted the temptation to offer up not-for-profit Beloit (Wis.) Memorial Hospital.
Three times in the past few years, hospital systems have pitched acquisition deals to Britton, the hospital's president and chief executive officer. Three times, Britton has turned down the suitors, ensuring that the 150-bed hospital remains among the shrinking ranks of independent hospitals.
"The focus of our board is that healthcare is local," Britton says. "We want to make our decisions locally. The board is pretty unified in that approach."
Financial health is a pillar of that independence. Beloit Memorial reported net income of $3.2 million on revenue of $70 million for 2003. Another pillar is the generous fund- raising support the community provides, Britton says, because local residents believe the hospital belongs to them.
Britton and Beloit Memorial are not alone in just saying no.
Overall, dealmaking was a little more common in 2003 than in 2002, according to Modern Healthcare's 10th annual survey of mergers and acquisition activity, but those deals were more likely to be joint ventures that didn't involve a change of control than in years past. Of the 68 deals logged for 2003, 12 were joint ventures, compared with just two joint ventures out of 60 deals in 2002. The survey includes mergers, acquisitions, joint ventures, long-term leases and other partnerships that were announced, completed or pending in 2003.
Three of the joint ventures were set up to build new acute-care hospitals, not including replacements, and two of the ventures involved selling minority stakes in existing facilities-deals that don't have a consolidation component to them. Three others involved not-for-profit systems selling a majority stake to investor-owned Triad Hospitals but retaining a minority stake in their hospital or system.
Continuing a trend that dates back to 1998, fewer hospitals were involved in dealmaking activity in 2003 than in 2002. Only 100 hospitals were involved in deals in 2003, down 38% from the previous year. Much of the difference can be explained by the absence in 2003 of a merger on the scale of 2002's combination of two Roman Catholic systems, Ascension Health and Carondelet Health System. That deal involved 67 hospitals.
Compared with the dizzying heights of 1996, last year's dealmaking looks even more paltry. The number of deals in 2003 was down more than 70% from the 1996 high of 235 and the number of facilities involved was down 87% from 768 in 1996.
Meanwhile, both openings and closings of hospitals rose significantly in 2003. Some 31 facilities opened their doors for the first time, compared with eight tracked by the magazine in 2002. Thirty hospitals closed, up from 17 the previous year. The magazine tracked general acute-care, psychiatric, surgical and other specialty hospitals.
If the dealmaking boom of the mid-1990s is looking more and more like a one-time anomaly, that's because the boom was largely spurred by a one-time event-the emergence of powerful managed-care organizations that, providers believed, were moving to impose strict capitation agreements on providers, says Lewis Redd, national healthcare practice leader for the Cap Gemini Ernst & Young consultancy.
It's a familiar story. Hospital executives came to believe that they would have to evolve into integrated delivery networks-one-stop healthcare shopping options with hospitals, nursing homes, physicians and wellness centers-or else they would be shunned by large health plans and large, self-insured employers, Redd says.
Now, Redd says, "Managed care is more pervasive, but it's not capitation. A lot of (the systems) didn't get all that integrated, so they didn't get the savings they expected." So the dominant theme isn't to get larger but to pare away anything considered noncore, he says. Mostly, that has meant hospitals shedding physician practices and health plans, but that downsizing attitude may also make systems more reluctant to take on more facilities in a merger or acquisition, he adds.
Moreover, hospital executives also have learned from the original deal frenzy that national consolidation rarely makes sense economically, says Peter Kongstvedt, a vice president for Cap Gemini who focuses on the managed-care industry.
Local and regional consolidation can work, Kongstvedt says, but "there was so much of this going on, and it was so rapid in the mid- to latter-half of the 1990s, (that) at some point, you run out of potential partners."
According to the American Hospital Association's annual survey, there were 2,666 independent hospitals in 2002, the latest year for which figures are available, compared with 2,839 in 1998 and 3,273 in 1994. The 2002 number represents just a 0.7% drop from the previous year.
Antitrust green light?
A few things remain that could spur more deals. Kongstvedt says there are still some markets where there are four or five competitors where consolidation could occur at some point; Atlanta is an example, he says.
With the exception of Tenet Healthcare Corp., the publicly traded hospital chains are seeing their stock prices rise, says Steve Braun, a healthcare transactions lawyer with Boult Cummings Conners Berry. Higher stock valuations mean those companies have more capital to spend on acquisitions, he says.
The Federal Trade Commission's recent "lookback review" of completed hospital mergers hasn't brought any retrospective merger challenges to date, Braun notes. Assuming no challenges emerge, he says, "I think it will embolden people to be more aggressive in terms of mergers and consolidations."
Letting those mergers stand after a review is, in a sense, granting them the FTC stamp of approval, Braun says, and that could "give dealmakers more incentives to push the envelope in terms of market share and concentration" figures in potential consolidation deals.
Robert McCann, a healthcare lawyer with Akin Gump Strauss Hauer & Feld, agrees that some hospital executives may have put consolidation talks on hold while the lookback review was being conducted.
"Frankly, it looks like (the review will end) not with a bang but a whimper," McCann says. "I get the sense that healthcare clients are saying, `Well, the landscape really hasn't changed.' There's less uncertainty about the antitrust environment changing."
Braun, McCann and Cap Gemini's Redd and Kongstvedt all agree on one thing: The top factor in an individual hospital's decision to seek a buyer remains that hospital's access to capital. Hospitals lacking that access will seek buyers, they say. Don May, vice president of policy at the AHA, points out that even the healthier systems that would be looked to as buyers may have trouble raising the capital, so that could put a crimp on deals.
As a lack of capital forces some hospitals to struggle to find a buyer, other independent hospitals will continue to fend off suitors. One such facility is Williamson Medical Center, a county-owned hospital in Franklin, Tenn.-which is smack dab in the middle of the investor-owned hospital country in Nashville's suburbs.
That location is the key to the hospital's ability to turn down the calls that it has been getting for years, says Williamson CEO Dennis Miller. The 140-bed hospital is the only hospital in wealthy Williamson County, which is the fastest-growing county in Tennessee.
Going back to the mid-1990s, the hospital studied mergers with Vanderbilt University Medical Center and the former Baptist Hospital System, both in Nashville, Miller says. His predecessors also fielded calls from local investor-owned companies such as Nashville-based HCA, and Community Health Systems and Province Healthcare Co., both based in Brentwood, Tenn.
"With the demographics that we had, there was no reason for (Williamson) to sell or merge with another entity," says Miller, who joined the hospital two years ago.
They still call, Miller says, but now they're seeking partnerships and service affiliations, rather than a merger or acquisition because it's clear that the hospital will stay independent. Williamson County gave the facility $20 million in 2002-the county's first-ever investment in the hospital-as part of a $50 million bond offering that is helping to finance an $80 million, 45-bed expansion. Williamson will have to repay the county the remaining $30 million on the bonds.
Like Beloit Memorial's Britton, Miller points to community support as a key to keeping Williamson's independent status. The hospital determined its mission was to allow local residents access to most of the care they need without visiting one of Nashville's medical centers, Miller says, and then their strategic planning showed them they could accomplish that mission.
Miller has one other piece of advice for hospital executives considering a sale: "He who controls the purse strings controls everything else."
-with Mary Chris Jaklevic
What do you think?
Write us with your comments. Via e-mail, it?s [email protected]; on the Web, use modernhealthcare.com; by fax, 312-280-3183; or through the mail, Modern Healthcare, Letters to the Editor, 360 N. Michigan Ave., Chicago, Ill. 60601. To publish letters, we need your name, title, affiliation, location and phone number.