Tenet's Baylor deal builds network strategy

Tenet Healthcare Corp.'s partnership last week with not-for-profit Baylor Scott & White Health is the latest example of the chain's departure from the traditional mergers-and-acquisitions playbook in favor of forming regional networks and positioning itself for broader payment reform.

Tenet isn't the only investor-owned hospital company using the tactic, but it is ahead of many of its peers as it seeks to develop provider networks that allow it to expand its use of insurance contracts that reward outcomes rather than high volume.

Under the deal, Baylor will own a majority stake in a group of five North Texas hospitals with Dallas-based Tenet as the minority partner. Four of the hospitals are Tenet facilities, while the fifth is a Baylor medical center. The hospitals will retain their respective leadership for operational purposes but will have a joint governing board. Tenet will adopt Baylor's charity-care and community-benefit policies.

The traditional M&A strategy for investor-owned chains has been to buy community hospitals, often in financial distress, in markets with favorable demographics. But interest in the joint-venture structure has grown as a way for for-profit operators to partner with health systems that aren't struggling and are not interested in a takeover. Moreover, a joint venture with an academic medical center provides access to a prestige-brand institution and relationships with its specialists.

“What each party brings to bear is pretty powerful,” said Rex Burgdorfer, vice president at Juniper Advisory, an investment bank that specializes in hospital M&A. “It's evidence that not-for-profit and for-profit worlds are converging. We're seeing these develop all over the country with some really high-end academics.”

Still, Tenet's alliance with Baylor Scott & White is unusual compared with other such deals. Although the deeper-pocketed investor-owned chain typically is the majority owner in such transactions, in this case, Baylor will hold the larger stake in the five hospitals. Tenet will operate its own legacy hospitals.

“It's interesting because usually the majority owner continues to operate the hospitals,” said Trey Crabb, a Nashville-based managing director at investment bank Ziegler. That seems to suggest that Tenet “has made the decision that these hospitals would thrive more under Baylor Scott & White than under Tenet,” he said.

The partnership also eases the way for another transaction that Tenet has in the pipeline. On the same day that it disclosed its deal with Baylor Scott & White, Tenet announced plans to merge its ambulatory-surgery and imaging-center assets into a joint venture with United Surgical Partners International, based in Addison, Texas. Tenet initially will own 50.1% of the joint venture and USPI's private-equity owner, Welsh, Carson, Anderson & Stowe, will own the remaining 49.9%. Tenet then plans to assume full ownership within the next five years.

The Tenet deal with USPI raised some eyebrows because of USPI's unique model of operating its centers in partnership with health systems. So Tenet will own ambulatory surgery centers that also are owned by other hospital companies. “Are (those other health systems) now in bed with a hospital (chain) that they see as a competitor in some way?” asked Joan Dentler, CEO of Avanza Healthcare Strategies, a consulting firm specializing in outpatient and population-health strategies.

In addition to the Baylor partnership, Tenet is on track to close a joint venture deal with Dignity Health and Ascension Health that will give it a majority stake in Carondelet Health Network in Tucson, Ariz. It also has a joint venture deal pending that will allow it to own 60% of Baptist Health System in Birmingham, Ala. Both transactions are scheduled to close in the second quarter, and all three systems are already USPI partners.

Unlike buying distressed hospitals, these alliances with not-for-profit systems are transformative deals for Tenet as it seeks to create regional networks, said Tenet CEO Trevor Fetter. Its USPI deal also furthers its strategy to augment its core hospital business with lower-cost outpatient facilities. “It's very consistent with everything we've been saying about our business for several years,” Fetter said.

Tenet also has been exiting markets where it can't create integrated delivery networks, Fetter said. The company plans to sell its Atlanta and North Carolina hospitals and could have a deal to announce this summer.

Providers like Tenet are reorganizing their portfolios as they prepare to assume financial risk and manage population health under value-based reimbursement contracts, Burgdorfer said. “You can't just have disparate dots on the map,” he said. “You need to have regional clusters.”