Taking a different path

Executives at not-for-profit hospitals are getting more aggressive in pursuing potential deals and also becoming chummier with their for-profit counterparts in forming long-term ownership partnerships.

In the name of getting ready for a healthcare reimbursement environment that places more emphasis on quality and continuity of care and less on fee-for-service payment, hospital executives increasingly are seeking to buy or sell hospitals using less-common ownership structures, helping to boost the number of deals in 2012.

Data collected for Modern Healthcare's 19th Annual Mergers & Acquisitions Report show the number of hospital deals climbing more than 18% to 109 in 2012, up from 92 deals recorded for 2011.

At the same time, with 10 not-for-profit hospital owners agreeing to deals that change the ownership of more than 160 hospitals in 2012, the number of hospitals in M&A deals rose to 352, up from the 212 the previous year.

Angela Humphreys, an attorney in the healthcare practice at Bass, Berry and Sims, says, “2012 continued to be a year of increased consolidation.”

Although the year had its fair share of vanilla acquisitions of not-for-profit hospitals by not-for-profit and for-profit buyers, “the M&A landscape was marked by a number of nontraditional transactions,” Humphreys says.

Included in the nontraditional category would be acquisitions by Duke LifePoint, the for-profit joint venture partnership between not-for-profit Duke University Health System, Durham, N.C., and LifePoint Hospitals, Brentwood, Tenn., as well as a joint venture formed between for-profit Health Management Associates, Naples, Fla., and not-for-profit Integris Health, Oklahoma City, to jointly own five acute-care hospitals in Oklahoma.

For the board of trustees at the not-for-profit Greater Waterbury (Conn.) Health Network, a joint venture with for-profit Vanguard Health Systems, Nashville, turned out to make the most sense after it decided to find a partner, says Darlene Stromstad, president and CEO of both the network and its Waterbury Hospital.

The network signed a letter of intent to form a joint venture in which Vanguard owns 80% and the network owns 20% in a pending deal. The board was seeking a partner to improve Waterbury's financial, operational and clinical resources, while keeping some ownership. The deal “provides more of an ongoing local voice,” Stromstad says.

Joint ventures such as Duke LifePoint, in which a not-for-profit system and a for-profit hospital system get together to buy hospitals, could become more commonplace over time, says James Burgdorfer, a principal for Juniper Advisory, an investment bank that specializes in healthcare M&A.

Such deals can be attractive for all parties involved. For example, trustees of a not-for-profit hospital considering a sale might be attracted to the for-profit partner's financial and operational expertise and the not-for-profit's partner's clinical quality and reputation. And both of the buyers would view the deals as a way to speed growth.

Humphreys says that nontraditional hospital owners such as insurers could continue to play a larger role as providers seek to become more integrated. Previous examples include three pending deals in which Pittsburgh-based insurer Highmark plans to buy seven Pennsylvania hospitals, and the completed merger between integrated provider HealthPartners, Bloomington, Minn., and health system Park Nicollet Health Services, St. Louis Park, Minn.

“It'll be interesting (to see) if that trend continues in 2013, not only with Highmark but with other payers,” Humphreys says.

—with Beth Kutscher