Duke, LifePoint join forces

Duke University Health System and LifePoint Hospitals might be the first academic medical center and investor-owned hospital company to form a joint venture to acquire hospitals, but they don't seem likely to be the last.

Duke, Durham, N.C., and LifePoint, Brentwood, Tenn., said last week that their venture, called DLP Healthcare, will look to own and operate community hospitals in North Carolina and adjoining states. The concept is to combine the clinical and quality expertise of Duke with the management expertise and capital of LifePoint. The ownership stakes of the two partners were not disclosed.

David Atchison, president and CEO of Ponder & Co., said he is aware of at least one other such potential tie-up, although he could not divulge the details. The clinical and management qualities and financial firepower of DLP Healthcare should have great appeal to many not-for-profit hospitals, Atchison said. Pairing up with Duke might give LifePoint an advantage when competing for acquisitions, he said.

“The alignment of an investor-owned (company) with a nationally, perhaps internationally, known not-for-profit medical center like Duke would temper any concern that a community hospital might have about a traditional investor-owned hospital company,” Atchison said.

DLP Healthcare also announced its first potential deal last week, as it has signed a memorandum of understanding to purchase an 80% stake in tax-exempt Maria Parham Medical Center, Henderson, N.C. Maria Parham would retain a 20% interest; governance would be split 50-50. More specific terms were not disclosed. Dr. W. Beverly Tucker, chair of Maria Parham's board, said the combination of Duke and LifePoint made for a more attractive suitor than any single organization could have been.

DLP Healthcare is a natural outgrowth of the clinical relationship between Duke and some LifePoint hospitals, said Dr. William Fulkerson Jr., executive vice president of the Duke system. “We found a lot in common as far as our commitment to quality, our commitment to the communities and the patients and the physicians,” Fulkerson said.

LifePoint would bring all the services it offers its 52 hospitals to DLP Healthcare hospitals, such as supply chain management, managed-care contracting and physician recruiting, said Bill Carpenter, chairman and CEO of LifePoint. “It's unprecedented to have two entities like this come together to provide care in community hospitals,” Carpenter said. “I think in a healthcare reform world, this is an innovative solution as we try to provide care in the appropriate setting, including the appropriate cost setting.”

Several investor-owned companies have joint ventures with academic medical centers that own individual facilities. HCA and Vanguard Health Systems, both based in Nashville; Tenet Healthcare Corp., Dallas; and Universal Health Services, King of Prussia, Pa., have joint ventures to operate hospitals with universities in New Orleans; Chicago; Omaha, Neb.; and Washington, respectively.

In another sign that scale is becoming more important, three county-owned hospitals in South Carolina announced that they would combine their operations at a new hospital to be built by a healthcare management firm and a private equity firm, according to a news release.

Ponder's Atchison said that deal is another sign of the interest that private equity firms have in converting tax-exempt hospitals into investor-owned hospitals, something made most clear last year in the acquisition of Caritas Christi Health Care by Steward Health Care System, owned by Cerberus Capital Management. Ponder has received calls periodically from private equity firms that want to invest in hospitals, and Atchison said he is aware of another potential tax-exempt conversion involving private equity. Again, he said he could not divulge details.

Unlike many hospitals that are looking for a partner for a joint venture or an outright sale, Maria Parham is on a solid financial footing and doesn't have major capital needs, said Bob Singletary, president and CEO of Maria Parham. For its fiscal 2010, which ended Sept. 30, Maria Parham recorded an operating income of $681,192 after breaking even on operations in fiscal 2009, according to its audited financial statements. Its fiscal 2010 net income was $1.2 million, more than double fiscal 2009's $458,394. Net patient service revenue was $92.3 million and total revenue was $94.4 million in fiscal 2010.

The hospital added a five-story patient tower with 130,000 square feet of space and renovated about 46,000 square feet in a project for which it sold $50.8 million in bonds in 2003, according to a bond disclosure.

“Capital was not the biggest driver of the need to affiliate,” Singletary said. “It was quality and management resources to handle all the regulatory and other pressures on community hospitals.” Besides the centralized services that Carpenter mentioned, Singletary also cited the ability to use marketing campaigns that LifePoint has developed for different service lines.

Maria Parham has some gaps in its medical staff, and the recruitment skills of LifePoint and the lure of clinical affiliation with Duke should help fill those gaps, Tucker said. The hospital also would like to draw on LifePoint's experience with managing employed physicians, as that is becoming more prevalent, Singletary added.