For-profit healthcare opened another major inroad into the not-for-profit world last week with private-equity-backed Steward Health Care System, Boston, offering to buy Miami's publicly run Jackson Health in a transaction worth at least $1.1 billion.
Will Jackson be next?
For-profit Steward wants publicly run Fla. system
If the deal comes to pass in about 90 days—both sides say they are conducting intense due diligence—the acquisition of Jackson Health would become the third mega-deal in a year's time in which for-profit ownership has swooped in where not-for-profit executives in urban markets have floundered financially.
In November, equity firm Cerberus Capital Management cemented an $895 million transaction to buy six-hospital Caritas Christi Health Care in Boston and turn it into Steward Health Care, which now proposes to buy Jackson. Caritas officials had threatened to close two hospitals if the transaction fell through.
The following month, for-profit Vanguard Health Systems bought six-hospital Detroit Medical Center in a $1.3 billion deal. At the time, Detroit's most recently completed fiscal year ended with only $4.1 million of net income on $2 billion in revenue.
The situation in Miami, however, appears the most dire of the three.
According to public records, Jackson Health's days cash on hand—a key measure of hospital fiscal health—has continued to dwindle despite cost-cutting efforts by management and multiple audits and investigations from outside agencies.
A Feb. 21 letter from Steward says that under current trends, Jackson is slated to use up all of its available cash by July—one month after President and CEO Eneida Roldan is expected to let her employment contract expire.
Jackson Health ended fiscal 2009 with a loss of $245 million, according to audited financial statements. Results for fiscal 2010, ended Sept. 30, are not yet available, a Jackson spokeswoman said.
Local media reports have quoted system officials at public meetings saying Jackson did better in fiscal 2010, finishing with estimated losses of about $90 million. The system is under investigation by the Securities and Exchange Commission for severely underestimating its unaudited losses shortly before selling $83 million in revenue bonds in August 2009.
The Feb. 21 letter of nonbinding interest from Steward Chairman and CEO Ralph de la Torre to Jackson Health Public Health Trust John Copeland III says that Steward proposes to spend at least $600 million in capital improvements and absorb another $500 million in existing debt held by Jackson. Steward would also pay for the system's recurring operating losses until it could turn the system around, amounting to about $200 million a year.
“We would like to note that we learned a great deal from the Caritas/Steward transaction, and we strongly believe the same compelling strategic and operating rationale exists for JHS aligning with Steward,” de la Torre wrote. “The integration of JHS, backed by the financial and operational strength of Steward, will create an enduring, comprehensive healthcare delivery system for the citizens of Miami-Dade and South Florida.”
However, “integration” doesn't appear to be Jackson officials' first choice.
Copeland said in an interview that Jackson is looking for a “capital partner,” and that it prefers to remain a public system, though he admitted the system's capital needs are considerable—more than $1 billion and counting, by his reckoning. He was not certain if Jackson would be accepting proposals from other companies to either purchase or partner with Jackson during a 60-day due diligence period—a fact-finding process that a Steward spokesman said would cost Steward $10 million to $20 million.
“I suspect there are definitely some folks who would be interested in being capital partners with us,” Copeland said. “There are public options we are evaluating along with this private option.”
De la Torre proposed that after Steward completes its due diligence, other companies would be allowed to review the proposal and supporting records under a 30-day “go shop” period, when they could make counter-offers. If the deal goes to another company, that entity would pay Steward's due-diligence costs.
Observers say it's not clear how for-profit operators such as Steward could plan to turn a profit running ailing safety-net hospitals such as those in Miami and Boston.
“I'm scratching my head trying to figure out how these guys are so much smarter than everyone else out there, or so risk-averse,” said David Atchison, president and CEO of Chicago healthcare financial consultancy Ponder & Co. “I'm really scratching my head on this, as I did on Detroit Medical Center.”
Officials with Vanguard and Steward declined to publicly discuss their business strategies.
Atchison speculated the for-profit operators are assuming the Patient Protection and Affordable Care Act will make the finances of large urban systems workable—chiefly through the extension of insurance coverage to 32 million more Americans.
De la Torre's Feb. 21 letter says Steward is banking heavily on another facet of the reform law—the accountable care organization model. The company already operates a management services company that supports care coordination, disease management, informatics and quality improvement.
One particularly unusual aspect of the Steward deal is the role of union labor.
Copeland said he first met de la Torre and other Steward executives through an introduction from officials with Jackson's major labor union, the Service Employees International Union, which also has a strong presence at several Steward hospitals.
Steward inked a five-year contract with its SEIU local one day before the Caritas deal received final regulatory approval. The contract gave union workers pay increases, pension funding and upward pay-scale adjustments for years of service, and in return, Steward received stability in its labor costs in coming years, Steward officials said at the time.
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