Community Health Systems' spinoff of 38 hospitals will allow it to catch up to some of its peers in building regional networks in larger markets, rather than focusing on a dispersed group of isolated facilities.
The Franklin, Tenn.-based chain, the largest in the country by hospital count, said last week that it plans to focus on midsize urban markets after the divestiture. CHS' admissions—and therefore earnings—have lagged some of its urban-focused peers such as HCA. The company's shares jumped about 6% after the plan was announced.
The new company created by the divestiture will include Quorum Health Resources, CHS' hospital management and consulting business, and will be known as Quorum Health Corp. The transaction is expected to be completed in the first quarter of next year.
Most of the Quorum hospitals are in markets with populations of less than 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. “The skill set is a little different.”
The deal allows CHS to create regional networks in larger markets, where its attention and funds have been focused. Quorum, meanwhile, can focus on the rural facilities and make investments in telemedicine and similar technologies, Smith said. Quorum also will be able to acquire more 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.
Rural hospitals as a group operate with margins of only 2.7%, meaning they are about half as profitable as urban hospitals, where margins average 5.3%, according to Rural Health Research Program data from the University of North Carolina at Chapel Hill.
They are also more likely to get a greater percentage of their revenue from outpatient care, which can hover near 70% for rural hospitals, compared with 47.1% for urban hospitals. At CHS, outpatient care represented 57.6% of its revenue in the second quarter, compared with 40% for HCA during the same period.