CHS set to leave the country for the city

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.

Still, while the rural hospital business is challenging, it also presents a long-term opportunity, said Joe Lupica, chairman of Newpoint Healthcare Advisors, a consulting firm.

“It's not just based on operating margins,” he said. “If we move forward with a paradigm of population health where lives become important … then rural hospitals become important. Rural hospitals don't have a lot of lives, but they're also in areas without a lot of competition.”

Also, rural hospitals tend to be isolated, which is at odds with CHS' goal of creating more regional networks. “That kind of puts the rural opportunity on hold,” Lupica said.

“Having looked at the acquisition profile of CHS, it's been restrictive,” he added. “I have a feeling that CHS can now open up a bit.”

CHS executives said the company is not planning any more acquisitions this year, which will help with its debt load. But the system is planning to develop more services in its existing 11 networks, as well as add hospital networks.

The Quorum hospitals average about $50 million in annual revenue and the combined group will see about $2.1 billion in revenue. Only a few were previously owned by Health Management Associates, the publicly traded chain that CHS acquired in January 2014. The majority are legacy CHS facilities.

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. 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.