Under the Duke LifePoint agreement, Duke University Health System receives a 3% interest in the initial equity of each hospital acquisition and does not have to put up any capital to fund the deals, according to financial statements filed to bondholders.
For its fiscal 2012 ended June 30, the system reported just $754,000 in noncurrent assets related to its investment in the joint venture.
The partnership is a chance for Duke to extend its brand—and tap into a new revenue stream—while minimizing its financial risk.
But the experiment does carry reputational risks, as Duke needs to show that it can franchise its core strengths and that its reach extends beyond the corporate letterhead.
Dr. Bill Fulkerson, executive vice president of Duke University Health System, noted that the joint venture is just beginning to forge a national strategy and developing new clinical programs is “part of our mission.”
“The main concern is not about diluting the brand, but about scaling our product,” Fulkerson said. “Our name is more important than just about anything else. That's our commitment—that you're getting Duke.”
Durham, N.C.-based Duke launched its joint venture with publicly traded LifePoint Hospitals, Brentwood, Tenn., in January 2011 with the acquisition of 102-bed Maria Parham Medical Center, Henderson, N.C.
Since then, the group has added 50-bed Person Memorial Hospital, Roxboro, N.C., and 86-bed Twin County Regional Healthcare, Galax, Va. The 812-bed academic medical center draws referral business from the smaller hospitals, all within 150 miles of its main campus.
But it was the July deal for 276-bed Marquette General that was a turning point for the joint venture—signaling its intention to be not only a regional health network, but also a national one, where potentially every region of the country is ripe with targets.
Leif Murphy, executive vice president and chief development officer at LifePoint, said the joint venture has a list of 50 “perfect candidates” to pursue, which he described as having a reputation for quality but in need of additional capital to meet the demands for technology and clinical upgrades. Duke LifePoint, he said, is focusing on hospitals in the southeast region stretching as far as eastern Tennessee and South Carolina, but also major acute-care hospitals that could be located anywhere.
LifePoint CEO Bill Carpenter declined to quantify how many deals he expects to pursue this year, but noted that LifePoint has acquired $500 million in new revenue with the joint venture's four buys with the potential to continue on that scale.
The national deals the joint venture plans to target will be distinct from the community hospitals the investor-owned chain usually pursues. Instead, it is looking for tertiary-care centers that have strength in Duke's core programs—cardiology, oncology, neonatology and sports medicine—but lack an academic partner.
“Marquette is a good example of what we think is possible for Duke LifePoint,” Carpenter said. “They have the ability to benefit from the expertise that Duke brings in that area.”
More acquisitions are likely to follow in Michigan's Upper Peninsula as Duke LifePoint attempts to build a regional network of hospitals that will refer more complex patients to Marquette. Carpenter noted that the goal is to have patients treated closer to home rather than travel to 759-bed Henry Ford Hospital in Detroit or the Mayo Clinic in Rochester, Minn., for care.
“What we've put together at Duke LifePoint is the ability to improve clinical outcomes with Duke's ability to provide care at the lowest cost setting,” Carpenter said.
The joint venture may also acquire ancillary care centers that complement the acute-care hospitals in the network, Murphy said. “The entire continuum of care is up for consideration.”
Officials from Duke and LifePoint have been quick to emphasize that Duke's involvement in the joint venture is larger than its equity interest might suggest.
Trey Crabb, managing director at investment bank Ziegler, noted that having Duke on board gives the joint venture an edge. “Duke is along for what they do best, which is the clinical piece,” he said.
Tertiary-care hospitals need access to capital—and if they still harbor any bias against for-profit systems, Duke's prestige is supposed to smooth any lingering doubts. In that way, the tie-up is intended to capitalize on the strengths of each partner: LifePoint's operating efficiency and ability to raise capital, Duke's clinical prowess and esteemed reputation.
In a seller's market, “it's not all about money; sometimes it's about structure, governance and fit,” Crabb said.
LifePoint Hospitals doesn't have a brand, something it readily acknowledges and takes prides in. It considers its Brentwood, Tenn., base a “hospital help center” rather than its corporate headquarters.
That's where Duke comes in. “Their brand carries with it the quality and clinical expertise that they're well-known for,” Carpenter said. “They were very careful to protect the Duke brand.”
Before they formed their joint venture, the two systems tested the waters when LifePoint's Danville (Va.) Regional Medical Center brought in Duke to run the cardiovascular service line at the 151-bed facility.
Other regional hospitals took note. And when Twin County Regional Healthcare undertook an 18-month due-diligence process to find a buyer, it had both Duke and LifePoint on an initial list of 28 potential partners.
“We were finding it increasingly challenging to remain viable as a community hospital,” said President and CEO Jon Appelbaum, who noted that systems came and gave a joint presentation. “The guiding principle with Duke LifePoint is creating a place where patients want to come for care.”
In a deal that closed April 1, LifePoint, through the joint venture, paid $20 million for an 80% stake in Twin County and committed another $20 million for capital expenditures over the next 10 years, according to LifePoint's stock exchange filings. The company also contributed $3 million toward physician recruitment efforts.
Appelbaum said the hospital has now invested in digital mammography, video endoscopy and wireless communication systems. “I'm confident that we will be able to measure significant gains in all measures of patient safety and patient care,” he said.
Duke had become accustomed to receiving inquiries from community hospitals that were struggling to go it alone. But Fulkerson said he was “a little surprised” when he learned that LifePoint had been looking at Marquette—and even more surprised that Marquette had an interest in working with Duke.
Marquette General Health System already had an affiliation in place with seven other partners in the Upper Peninsula when it started to look for a buyer. The alliance was intended to help prepare for the challenges of healthcare reform, including setting up an accountable care organization.
But local affiliations “wouldn't change anything for us in terms of access to capital,” said Judy Watson-Olson, vice chairwoman of the hospital board.
So in September 2011, Marquette selected a financial adviser that helped whittle down a list of 26 potential companies—both for-profit and not-for-profit, inside and outside Michigan—that could be potential partners.
Gary Muller, Marquette's president and CEO, noted that the three physicians on the search committee of about a half-dozen people were instrumental in selecting Duke LifePoint. “The physicians liked the (access to capital) but, boy, did they like the quality.”
As part of the deal, which closed Sept. 1, LifePoint paid $132.7 million in cash for the system and committed another $350 million to invest in capital improvements and physician recruitment.
Joint ventures between for-profit and not-for-profit systems date back as far as the 1996 partnership between HCA, Nashville and St. David's Hospital, Austin, Texas. “It was a very controversial approach at the time,” said Chris Jedrey, a healthcare M&A attorney at law firm McDermott, Will & Emery.
Pushback from the Internal Revenue Service to limit these types of deals—including a subsequent legal fight over St. David's tax-exempt status—also had a chilling effect.
“There's been a revival of joint venture deals,” Jedrey said. “At this point, the market is much more accepting of this fact. … A lot of this is driven by access to capital.”
Academic medical centers in particular have an educational and research mission that requires access to larger numbers of patients and patient revenue, Jedrey noted. He added, though, that operating in multiple markets has not been a standard component of these deals.
“I think this is a changing landscape, the definition of where these academic medical centers play and how they use their brands,” said R. Lawrence Van Horn, executive director of health affairs and associate professor at Vanderbilt University's Owen Graduate School of Management. “Duke is a little bit out in front of this, but I wouldn't be surprised if we started to see other academic medical centers building their brand, building their referral business.”
Van Horn noted that potential challenges include cultural differences between the partners as well as being able to convince patients and clinicians that the academic medical center is along for more than just marketing purposes. “You have to be able to franchise that delivery model,” Van Horn said.
Other academic medical centers are already following suit. In September, Tufts Medical Center, Boston, said it was partnering with Vanguard Health Systems, Nashville, and a physician network in Massachusetts to form a new system that would also seek acquisitions.
“I would say every major academic medical center in the U.S. has been contacted by … companies looking to do the same thing,” Ziegler's Crabb said. “That's a given.”