Nation's largest investor-owned hospital systems are in full retreat

When it comes to provider consolidation, 2016 may well be remembered as the great unraveling.

Some of the nation's largest investor-owned hospital systems are in full retreat as they look to reduce debt burdens taken on during the past decade's merger-and-acquisition binge. Even some large not-for-profit systems are suffering from indigestion—witness the ongoing merger talks between Dignity Health and Catholic Health Initiatives, driven in large part by the latter system's unsustainable debt load from its acquisition spree.

The giant investor-owned hospital companies such as HCA Holdings, Community Health Systems and Tenet Healthcare Corp. are either selling hospitals or largely staying on the sidelines. Meanwhile, it's regional not-for-profits such as MultiCare Health System in Tacoma, Wash., and WellStar Health System in metropolitan Atlanta that are buying the hospitals that the for-profits don't want anymore.

These deals “are deeply strategic,” said Fitch Ratings Managing Partner Megan Neuburger.

The regional not-for-profits are looking to grow and, perhaps, gain a statewide footprint to better manage populations and to achieve economies of scale and more leverage negotiating with insurers, Neuburger said. That's perceptibly different from even two or three years ago when it was OK to add hospitals for the sake of boosting revenue and earnings, she said.

Franklin, Tenn.-based CHS has spent the past several months trying to unwind major parts of its 60-hospital, $7.6 billion acquisition of Health Management Associates in 2014. Of the eight hospitals that CHS agreed to sell in last year's second half, four are former HMA facilities. Not-for-profit Curae Health in Clinton, Tenn., is buying those hospitals, three of which are in Mississippi and the other in Florida.

CHS, which is under pressure to reduce a $15 billion wall of debt, is negotiating to sell an additional nine hospitals. At a luncheon program this month in Nashville, CHS CEO Wayne Smith said the hospitals up for sale tend to be on the periphery of urban areas, which is attracting interest from large not-for-profits for referrals and inclusion in regional networks. “This old 'spoke and wheel' concept that people have had through the years seems to be coming back,” he said.

CHS raised $1.2 billion in April by spinning off 38 small and rural hospitals into a separate new public company, Quorum Health. CHS, with 158 hospitals, is the nation's second-largest investor-owned hospital company by revenue.

Executives at the not-for-profit and for-profit health systems say that the days of buying hospitals for the sake of getting bigger are over. Speaking with stock analysts in December, LifePoint Health CEO Bill Carpenter said the investor-owned hospital company likely would not pursue any of the CHS hospitals for sale.

They don't provide a geographic advantage for LifePoint, he said, and they already are so well-run that they would offer little room to improve operations and earnings. LifePoint is the nation's fourth-largest investor-owned hospital company by revenue.

On the other hand, MultiCare, a five-hospital not-for-profit system based in Tacoma, Wash., jumped at the chance to gain a strong foothold in the eastern part of the state when CHS put up for sale its two profitable hospitals in the Spokane area. In an interview in November, MultiCare CEO Bill Robertson said purchasing CHS' Deaconess Hospital, Valley Hospital and multispecialty Rockwood Clinic added about $525 million in revenue to a MultiCare system that was already at $2 billion.

The Spokane system, known as Rockwood Health System, offers a good continuum of acute-care and ambulatory access, giving MultiCare a greater statewide presence. It agreed to pay CHS $425 million for the system. The deal is expected to be completed early this year.

Not-for-profit Northwell Health is one of the most active players in a New York City market undergoing frenzied consolidation. Northwell, which now has 21 hospitals after adding three over the past two years, is negotiating to add a fourth hospital acquisition, CEO Michael Dowling said during recent J.P. Morgan Healthcare Conference in San Francisco.

He said it's a hospital—which he declined to name—that joined with another system some years ago and now is looking to partner with a larger system that can bring physicians and new ambulatory access points.

Dowling said as reimbursement shifts from fee-for-service to value-based payments that require providers to take on risk for managing patient populations, there's pressure to increase scale and geographic reach.

“All of the major players in New York are continuously trying to consolidate,” Dowling said. “There are a couple of hospitals in play at the moment. And you have to ask yourself, if you don't take a gamble on working with one of them then your competition is going to get it.”

Northwell, based in New Hyde Park on Long Island, also has been gobbling up physician practices in metropolitan New York. Since 2010, the system has used a series of acquisitions to increase its employed physician number from 1,600 to 3,900, with perhaps another 1,500 employed physicians or those in independent practice coming aboard this year, Dowling said. Northwell's annual revenue is about $11 billion.

“On the physician side, there's been increasing consolidation. I remember not so many years ago that if you had 100 physicians in a group it was huge. Today, there is a group about a half-block from my office that has almost 700 physicians in it,” Dowling said.

The 60-physician University Physicians Group in New York City was one of the physician practices last year that agreed to join Northwell. It needed capital for information technology and wanted operational support from the large system as it prepares to shift from fee-for-service to value-based purchasing.

To extract equity from their practices, doctors have to trade away some of their business independence. In return they get a stable paycheck and access to the capital to update their technology, said attorney Phil McSween, chairman of the health law group at Baker Donelson, which merged with Ober Kaler a month ago. “This segment has taken off,” said McSween, who is in the Nashville office of the law firm.

Tenet, the nation's third-largest investor-owned hospital company, was a net seller of hospitals in 2016. Not-for-profit WellStar Health System of Marietta, Ga., paid $575 million in April to buy Tenet's five hospitals in Atlanta.

WellStar was itching to get into Atlanta's fast-growing market. And its proximity to Marietta will allow for some shared services. It also hopes to bring its expertise in operating accountable care organizations to that market, WellStar CEO Candice Saunders said at the time.

At the J.P. Morgan conference, Tenet CEO Trevor Fetter told analysts that the company is trying to sell additional noncore hospitals and its home health and hospice business. The Dallas-based system intends to focus its capital and management resources on ambulatory care and hub markets where it has first- and second-place market share, Fetter said. Those include San Antonio, Detroit and South Florida.

The biggest potential hospital deal not only of 2016 but this century is brewing between two Catholic-sponsored not-for-profits, Dignity Health of San Francisco and Catholic Health Initiatives based in Englewood, Colo.

They promise to announce by June whether they plan to merge, enter into a looser affiliation or stay independent. A merger would combine Dignity's $12.6 billion in revenue with CHI's 103 hospitals and $15.9 billion in revenue to create the nation's largest not-for-profit hospital system.

Dignity CEO Lloyd Dean said at the J.P. Morgan gathering that CHI brings geographic diversity to the talks with its hospitals spread over 22 states and different insurance plans. Dignity operates 39 hospitals in California, Arizona and Nevada. Dignity has excelled in using joint ventures, often with for-profits, to stretch its capital and provide more patient access points in ambulatory surgery centers, urgent-care locations and even micro-hospitals. The talks, Dean said, are “not a path to get bigger but to get better.”

Though the nation's largest investor-owned hospital company—169-hospital HCA—hasn't quite sworn off hospital acquisitions, it remains relatively cautious. Aside from acquiring the assets of two shuttered facilities belonging to Forest Park Medical Centers in the Dallas area in 2016, Nashville-based HCA focused its $2.7 billion in capital spending on building out clinics and ambulatory sites in its hub markets of Miami, Dallas, Houston, Tampa, Fla., San Antonio, Nashville and Richmond, Va.

The biggest hospital deal it announced in 2016 was a decision to sell its interest in Oklahoma University Medical Center in Oklahoma City and OUMC Edmond to an affiliate of the University Hospitals Authority and Trust. HCA reaped $750 million from the deal. St. Louis-based SSM Health, a not-for-profit, is now preparing to run the academic health system.

Not-for-profits are smart to take advantage of the hospital portfolio pruning that the investor-owned hospital systems have in full swing right now, said attorney Torrey McClary, a partner with Hogan Lovells, who was lead outside counsel for Vanderbilt University's 2016 spinoff of Vanderbilt University Medical Center in Nashville. Just because a for-profit is divesting a hospital “doesn't mean it doesn't have value to another operator,” McClary said.