When the going gets tough, the tough get reorganizing.
Over the past three years, the going -- at least the operating environment -- has gotten tougher for hospitals, and investor-owned hospital companies are reacting with corporate reorganizations and strategy changes.
The chains began reporting slower volumes in the first quarter of 2003, and they pointed to the Iraq war, employment softness and higher co-payments and deductibles as causes. The last of those, a result of employers pushing plans that have consumers paying more out-of-pocket, lingers as a factor. Later that year, the chains started reporting higher levels of bad-debt expense, which is also associated with higher co-payments and deductibles as well as uninsured patients. The greatest challenge, however, has come from physicians. Whether hospitals are courting physicians or competing with them, interacting with doctors is perhaps the most important duty of a hospital chief executive officer, said Joseph Vumbacco, vice chairman and CEO of Health Management Associates.
"In today's marketplace, the physician is not only a customer, but a competitor," Vumbacco said in an interview last week. Hospital CEOs have to work on many physician-related fronts, he said, from recruiting and retaining scarce specialists and ensuring emergency department coverage to looking for partnerships that allow physicians to augment their incomes -- and eliminate them as competitors to the hospital.
These challenges have come in a financial environment that's largely favorable to hospitals, but to investor-owned hospital companies in particular. These firms have had no trouble financing their companies with debt despite the lack of investment-grade ratings for most (although HMA has an investment-grade rating). Moreover, some of the private equity interest in healthcare services that has fueled physician competition has found its way into acute-care hospital companies, through startups, such as Attentus Healthcare and Signature Hospital, and recapitalizations of established companies, such as Iasis Healthcare Corp. and Vanguard Health Systems.
Flatter structure, faster decisions
HMA's response to these challenges started last year with the hiring of Burke Whitman as president and chief operating officer. Whitman had been the chief financial officer of Triad Hospitals, Plano, Texas, and that company's focus on physician relationships provided just the experience that HMA sought, Vumbacco said. Whitman now makes the decisions that used to fall to Vumbacco, and there is now only one step (the regional vice president) between the hospital CEOs and the final arbiter, cutting out a layer of the decisionmaking process.
Darren Lehrich, healthcare services stock analyst for Deutsche Bank, said Whitman's hiring was just the first step for HMA. "What's unique about their structure is that they've taken two very seasoned executives in the company and allocated key strategic initiatives to those individuals and created (more) divisional structures than before," he said. Lehrich was referring to two new regional vice president positions that HMA created.
One is dedicated to physician relationships and joint ventures, and the other works with hospitals that are tackling significant turnarounds. HMA also added a CFO dedicated to each regional vice president, rather than spreading the duties among a couple of regional CFOs. The hospitals assigned to the turnaround group eventually could be candidates to be sold, Lehrich said.
HMA, after it completes the acquisition of its 62nd hospital as planned this week in Gulfport, Miss., is slowing its purchasing program. It's a reasonable move, Lehrich said, given the organizational changes and the tremendous resources that will be needed in the company's home market of Naples, Fla. HMA recently purchased 70-bed Cleveland Clinic Hospital-Naples and is building Collier Regional Medical Center, which is 60% complete and should open by February 2007, Vumbacco said.
LifePoint Hospitals, Brentwood, Tenn., is another nonurban hospital chain that has slowed its acquisition pace. The company had a dramatic 2005, as it doubled in size by completing its $1.7 billion acquisition of Province Healthcare Co., Brentwood, and smaller acquisitions. Integrating those hospitals has challenged LifePoint. Province ran a more centralized physician-recruitment-and-retention program than LifePoint does, so training had to be expanded in this area for hospital CEOs, LifePoint said earlier this year.
The company did not respond to calls seeking comment for this story. Lehrich said LifePoint should reap some benefits later this year from the increase in recruitment training.
HCA, Nashville, began reorganizing its hospitals from two geographic groups to three last fall with the same goal that HMA has. "It's a true flattening of the organizational chart to get the hospitals and the folks in the hospitals closer to their senior managers and get those resources to them," HCA spokesman Jeff Prescott said. That has created a lot of job shuffling as HCA largely promotes from within, but that also has provided a lot of career opportunities, Prescott said.
Similarly, HCA used an organizational change when it started a separate group more than two years ago to emphasize development of outpatient services. HCA sees both of these organizational changes as more refinements than restructurings of its corporate organization, Prescott said. The company also is in the process of divesting 10 hospitals, five of which have already been sold, but Prescott said those sales aren't a major change for a company that still operates about 180 hospitals.
Tenet Healthcare Corp., of course, has changed a slew of executives and its corporate structure since the twin shocks that hit the company in October 2002: the Medicare outlier investigation and the allegations of unnecessary heart procedures being performed at the former Redding (Calif.) Medical Center. The company's most recent organizational focus has been similar to what HCA and HMA have been looking for in terms of creating smaller units at division and market levels. In early May, Tenet announced the creation of an outpatient services group that hopes to build on its TenetCare outpatient initiative. Tenet declined to be interviewed for this story.
"We think the culture has definitely changed," Lehrich said. "It's become a lot more humble over the last couple of years. Tenet used to be known as a very aggressive culture -- in terms of finding ways to grow and pushing the limits of the rules -- and that's started to change, and that's for the better."
The acquisitions environment has played a key role in decisions made in the past year by two investor-owned companies. Privately held Ardent Health Services, Nashville, and publicly traded Universal Health Services, King of Prussia, Pa., reacted differently to the higher valuations that behavioral health assets have been drawing in the acquisition market.
Ardent sold its psychiatric hospital division to Psychiatric Solutions for $560 million, while Universal boosted its highly profitable psychiatric division with several acquisitions last year, the biggest being the purchase of Keys Group Holdings for $207 million.
David Vandewater, president and CEO of Ardent, said the company wasn't looking to sell, but it received five offers from three bidders over the period of a year. As the price rose, the company became more interested because of what it could accomplish with those funds, he said. Ardent paid down its public debt, which allowed it to cease filing quarterly and annual reports with the U.S. Securities and Exchange Commission and to avoid costly compliance with the Sarbanes-Oxley Act of 2002. More importantly from an operations standpoint, Ardent was able to speed up its capital projects in its key markets, Albuquerque and Tulsa, Okla.
Universal doesn't consider its moves last year to be a change in strategy, as the company has owned psychiatric assets for more than 20 years, CFO Steve Filton said. "It looks more dramatic in 2005 because we did one multifacility acquisition," he said.
Lehrich said Universal is missing an opportunity to maximize returns from its psychiatric business. The company should either sell or spin off those assets or take the struggling acute-care division into a privately held company, leaving a Universal that is solely in psychiatric care, which should increase the share price, he said.
Filton said Universal's management seeks returns over the long haul, while many shareholders and analysts have much shorter time horizons.