MedCath Corp. could be gone within a year, liquidated through a series of sales because the company's strategy has taken hits from regulators, market pressures and physician practice changes, analysts say.
MedCath could be on the way out
MedCath, Charlotte, N.C., announced late last month its third sale of a stake in a heart hospital this year. The company has signed a definitive agreement to sell its one-third stake in 55-bed Avera Heart Hospital of South Dakota, Sioux Falls, to one of its partners in the hospital, Avera, also based in Sioux Falls. Avera, a 14-hospital system, will pay $20 million, plus an adjustment for working capital acquired in the deal, MedCath says.
MedCath's two other deals this year, in Austin, Texas, and Phoenix, have been prompted in part because the cardiologists who used the hospitals sold their practices to competing systems. Those practice sales are examples of a major shift by specialists to join forces with bigger, broader acute-care hospital systems, says Whit Mayo, senior research analyst at Robert W. Baird & Co. Many specialty groups, especially in cardiology, have found it harder to manage their practices, and cardiologists in particular have seen income from ancillary services evaporate over the years, Mayo says.
MedCath also found itself excluded from managed-care contracts in markets where a few dominant systems could lock its hospital out, Mayo says. Those challenges led to an attempt to change strategy long before the healthcare reform law closed the whole-hospital exemption to the Stark self-referral laws, Mayo says.
“It's going to be difficult to manage these hospitals over the long term with a narrow service line and no primary-care base,” he adds. “Aligning with a general acute-care system, you are playing more defense, diversifying. For the past five years, this company has been trying to diversify away from the pure physician-based business and hasn't been able to get past cardiology.”
The individual sales came after MedCath made efforts to sell the company as a whole, says Trey Crabb, president of Nashville-based Health Strategies Partners, a financial and transactions advisory firm. Crabb also pointed to the health reform law's limits on the growth of doctor-owned hospitals as a factor in the company's likely liquidation. “Physician-owned hospitals and other entities have found themselves in a situation where they cannot grow because of those regulatory changes, and they are looking for alternatives,” he says.
Crabb says it's likely that a series of deals will liquidate the company over the next 12 months. In most cases, the buyers will be local strategic buyers with a significant presence in the market already, as has been the case with the three deals announced this year.
MedCath's 88-bed Harlingen (Texas) Medical Center is another that would be ripe for a sale such as the one in South Dakota, with partner Valley Baptist Health System, Harlingen, buying out MedCath's interest, Mayo says. These buyers will be able to add the heart hospital to their managed-care contracts and extract a lot more value out of the assets than MedCath could standing on its own in these markets, Mayo says.
MedCath, which declined to comment, owns an interest in and operates nine hospitals, counting the three it has agreed to sell.
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