Change and a slow strategy for dealing with it may have led MedCath Corp. to consider either a sale of the company, which specialized in physician joint ventures, or of its individual hospitals and assets, industry watchers said.
MedCath considers sale after slow reaction to changes
Late last year, Charlotte, N.C.-based MedCath engaged Navigant Capital Advisors to help the company evaluate alternatives that would create shareholder value, said O. Edwin French, the company's president and CEO. On March 1, the company said that a committee of independent directors would work with Navigant to decide whether to sell MedCath in whole or in part, and that Edward Casas, a senior managing director at Navigant, resigned voluntarily from MedCath's board. French said the company does not have a deadline for making a decision.
The news came weeks after St. David's HealthCare—a joint venture between HCA and St. David's Foundation—announced its purchase of 58-bed Heart Hospital of Austin from MedCath (which owned a 70.9% stake) and physician investors for $83.6 million (“HCA-St. David's buying MedCath hospital,” Feb. 22 ).
According to French, MedCath saw the potential to diversify away from heart care and has invested heavily in its hospitals by expanding emergency departments, adding diagnostic imaging, and adding beds that aren't solely for heart patients. But this strategy may have been a case of too little, too late.
“As they become cognizant that their success would lead them to other, noncardiovascular services, they needed to have more support in the physician community to be successful with that,” said Darren Lehrich, who serves as managing director at Deutsche Bank Securities. “They put all their eggs in one basket with the partnership model and then tried to diversify and got caught short without enough support in the marketplace to be successful with diversification.”
Lehrich identified what he called two “megatrends” that have affected MedCath: first is the recent shift in the cardiovascular business away from inpatient to outpatient procedures.
The second trend is the hospital employment model, in which local hospitals and health systems are employing not only primary-care physicians but also specialists.
“MedCath in some cases is being squeezed out of that physician value stream due to some of this employment,” Lehrich said. “The case in point was the Austin deal, where HCA's St. David's partnership acquired the lead cardiology group at the hospital that MedCath owns, and MedCath was left with no other option but to sell.”
In February, MedCath reported revenue of $147.3 million for the three months ended Dec. 31, 2009, down about 2% from the $150.2 million it reported in the same period a year ago. But the company's 2009 annual revenue increased from the prior year as the company reported total revenue of $602 million for the year ended Sept. 30, 2009, up 1.8% compared with $591.6 million for the same period in 2008. After the Austin sale, MedCath owns an interest in and operates nine hospitals in seven states.
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