The corporate organization that was Triad Hospitals is dead and buried, but the strategy most associated with Triadjoint ventures with not-for-profit hospitalslives on. Legacy Hospital Partners nearly reincarnated Triad when it launched in January with much of the Triad leadership team, including Denny Shelton, Triads only chief executive officer (Jan. 21, p. 6).
Last week, however, Health Management Associates employed Triads joint venture strategy with a twist: using one to raise cash rather than spend it in pursuit of growth. The Naples, Fla.-based company announced that it sold a 27% interest in seven of its 55 hospitals to not-for-profit Novant Health, Winston-Salem, N.C., for $300 million. HMA and Novant have formed a joint venture to operate the hospitals, all of which are in North Carolina or South Carolina.
The Novant deal and a hospital sale by Tenet Healthcare Corp. in Fort Lauderdale, Fla., are examples of the role reversal of for-profit chains and not-for-profit systems, said Bill Baker, partner in charge of healthcare transaction services for KPMG. Some of the historical aggressiveness by the for-profit hospital companies may be somewhat muted in the short term due to credit market concerns and decreased liquidity in the marketplace, Baker said. For-profit hospital companies are making fewer acquisitions because it is more difficult to refinance bonds when they come to term, he said.
With fewer of the private-equity-backed chains making acquisitions, the price of deals is more reasonable for strategic not-for-profit acquirers, Baker added.
The deal provides cash for HMA as it faces the potential refinancing of $575 million in convertible bonds this summer. Those bondholders have an option that, at the current HMA share price of just under $6, they would be expected to exercise on Aug. 1, said Burke Whitman, president and chief executive officer of HMA. The company is preparing to refinance the bonds with a mix of cash from operations and transactions, new debt and the offering of new terms to the bondholders, Whitman said.
Generating cash, however, was not the motivation for the deal with Novant, Whitman said. The discussions began before it became clear that the options are likely to be exercised, and Novants strength in clinical quality and the great geographic fit made the system an ideal partner, Whitman said.
HMA also announced the closing of one campus of its 307-bed Dallas Regional Medical Center in Mesquite, Texas. The campus had been converted to a specialty womens hospital in the fourth quarter of 2007, but it became quite apparent that the change wasnt enough to reverse its financial losses, Whitman said. Heavy competition in the Dallas market for obstetrical and gynecological services played a role, he added.
Both the joint venture and the Mesquite closure are part of a pruning of the companys 55-hospital portfolio, Whitman said. A small handful of facilities could be sold or closed, he said.
For Novant, the deal with HMA was an opportunity to complement its eight hospitals in North Carolina, Novant spokesman Jim Tobalski said. The system expects big gains from sharing clinical best practices between the hospitals and common recruitment of physicians, and some gains are possible in group purchasing, especially of technology, Tobalski said. As part of the deal, physician practices employed by HMA will shift to Novant, with HMA agreeing to subsidize the practices for us to three years.
Novant completed another deal with a heavy Carolina aspect in October when it completed its purchase of diagnostic imaging chain MedQuest, which came with 91 centers. Novant paid $45 million in cash and assumed $358 million in debt issued by MedQuest. Novant is still exploring the best opportunities to coordinate care between its hospitals and physician practices and the MedQuest facilities, Tobalski said.
Meanwhile, Dallas-based Tenet completed the sale of 391-bed North Ridge Medical Center to 431-bed Holy Cross Hospital for $20 million. Holy Cross announced plans to shut North Ridge and consolidate services on its campus. Both hospitals are in Fort Lauderdalea market that KPMGs Baker said is overbedded. For Holy Cross, the acquisition allows it to spread its fixed costs over greater patient volume, Baker said.