Community Health Systems' spinoff of 38 hospitals comes as rural markets are facing increased financial pressure.
The Franklin, Tenn.-based chain, the largest in the country by hospital count, plans to focus on midsize urban environments after the divestiture. CHS' admissions—and therefore earnings—have lagged behind some of its urban-focused peers such as HCA. The company's shares opened Tuesday about 6% higher than the previous day; CHS disclosed the spinoff after trading hours Monday.
The new company will include Quorum Health Resources, CHS' hospital management and consulting business, and will be known as Quorum Health Corp. CHS expects to complete the transaction in the first quarter of next year.
Most of the Quorum hospitals are in markets with a population under 50,000, and 84% of them are the sole acute-care providers in their communities. “It's a business that requires a lot of attention,” CHS CEO Wayne Smith said on an analyst call Tuesday. “The skill set is a little different.”
The spinoff allows CHS to concentrate on creating regional networks in larger markets, which is already where its attention and funds have been focused of late. Quorum, meanwhile, can focus on the rural facilities, with investments including telemedicine and similar technologies, Smith said. Quorum also will be able to pursue additional acquisitions of rural hospitals.
“We feel that we need to be a much broader system now and look at larger markets to get market share,” Smith said. “The issue in the non-urban markets really is an economic issue more than anything else. The real issue is employment.”
Only a handful of the hospitals were previously owned by Health Management Associates, the publicly traded chain that CHS acquired in January 2014. The majority are legacy CHS facilities. The hospitals average about $50 million in annual revenue and the combined group with Quorum will have about $2.1 billion in annual revenue.
Nine of the new company's 16 states have expanded Medicaid, according to Smith.
The divestiture isn't the first time a publicly traded chain has spun off hospital assets. In 1999 HCA spun off LifePoint Hospitals and Triad Hospitals in a similar move. LifePoint continues to operate as a stand-alone publicly traded hospital operator with a rural focus. In 2007 CHS acquired Triad and Quorum Health Resources, a Triad division.
Separately from the spinoff, CHS also confirmed that it is no longer pursuing a deal with Metro Health Corp. in Wyoming, Mich., after nearly two years of negotiations. The company did not elaborate on why discussions ended. CHS originally planned to buy Metro Health as part of its alliance with the Cleveland Clinic, but the two partners ultimately decided not to pursue joint acquisitions.
On the earnings call, CHS executives said the company is not planning any more acquisitions this year, which will help with its debt load.
CHS reported Monday that second-quarter patient admissions decreased 2.2%, but only 0.2% when adjusted for outpatient activity. The chain also saw net income of $111 million on $4.8 billion in revenue in the second quarter compared with a net loss of $42 million on $4.7 billion in revenue in the same period last year.