The face of Community Health Systems would change dramatically if the hospital giant accepted a physician-led buyout offer for its eight hospitals in Fort Wayne, Ind.
Though a tiny fraction of CHS's 155 hospitals across the nation, the eight hospitals that comprise the Lutheran Health Network generate 15% to 20% of struggling CHS's annual earnings before interest, taxes, depreciation and amortization, J.P. Morgan analyst Gary Taylor said in a note to investors Thursday.
That translates to $350 million annually at an EBITDA margin of 25% on revenue of about $1.1 billion.
"Would CHS sell the crown jewels?" Taylor asks in the title of his report.
Up to 300 physicians in Fort Wayne, Ind., who believe Lutheran is subsidizing the rest of CHS are leading a group backed by undisclosed private-equity players to buy the eight hospitals.
The group has made an offer to buy the hospitals, and CHS is considering it, according to Dr. John Crawford, a Fort Wayne city councilman and co-founder of Radiation Oncology Associates that is not a part of the buyout group.
The proposal has support from at least 100 doctors practicing at Lutheran, Crawford said at a press conference on Friday.
"If disgruntled doctors leave or open their own hospital, your (CHS) assets could be worth significantly less in a year," Crawford said in a phone interview Friday.
But Taylor is dubious that Lutheran is a divestiture candidate.
CHS is in the middle of a campaign to sell lower-performing hospitals and other assets to reduce a $15 billion debt burden, Taylor said. The system, the nation's second-largest investor-owned hospital company, posted a net loss of $1.7 billion in 2016 on revenue of $18.4 billion.
Of the 30 hospitals that CHS has agreed to sell to multiple buyers, most have mid-single digit EBITDA margins, according to new CHS Chief Financial Officer Thomas Aaron. Those hospitals also are in markets where CHS only has one to three hospitals, not eight as is the case in Fort Wayne.
Taylor said CHS has stated its intent to maintain its regional networks, such as Fort Wayne, where it has several hospitals that can provide opportunities for buying economies, sharing medical staff and building out ambulatory facilities offering convenient and low-cost patient access.
The sale of the Fort Wayne hospitals would run counter to CHS' prevailing hub strategy, Taylor said.
"We are skeptical (CHS) would consider selling such a profitable regional network given the company's new strategic focus on such assets," Taylor wrote.
Franklin, Tenn.-based CHS is showing little inclination for selling the Fort Wayne jewels.
To the contrary, the system last week announced a $500 million plan to reinvest in facility upgrades and technology at the hospitals.
"We are very excited about the $500 million capital plan announced last week and the opportunity to make a transformative investment that will enhance patient care and expand health services in Fort Wayne, as well as bring jobs and other economic benefit to the community," CHS spokewoman Tomi Galin said in a statement.
Beyond that, she said CHS does not comment on divestiture or acquisition activities.
Crawford said the timing of the CHS capital-spending investment was "suspicious," as it came on the eve of the buyout offer. One of the key criticisms of the physicians trying to buy Lutheran is that CHS has failed to reinvest adequately in Fort Wayne given the importance and profitability of the division to CHS.
Indiana, which includes Lutheran's eight hospitals and three others, is CHS' fourth-biggest market by revenue. Indiana represents about 10% of the company's revenue. It's also CHS' most profitable market.
If it were to be sold, CHS would be left with four other regional markets of note: Florida, with 24 hospitals accounting for 15% of revenue; Pennsylvania, with 13% of revenue; Texas, at 11%; and Tennessee, at 7%, according to a CHS investor presentation shared this week at the Bank of America Merrill Lynch 2017 Health Care Conference.
Many of the Florida hospitals were part of the disastrous $7.6 billion purchase by CHS of Health Management Associates in 2014. Those HMA hospitals have generally underperformed CHS' legacy hospitals and are a prime reason why CHS is shedding assets to pay down debt.
The Fort Wayne hospitals might fetch a high price, said a senior executive with a competing hospital chain who asked not to be identified.
CHS has been getting buyers to pay about 12.5 times EBITDA, Aaron told the Bank of America analysts this week.
But once Fort Wayne is gone, there would be limited assets left to carry CHS' improvement plan, the executive said.
The Fort Wayne doctors heading the proposed deal own a small financial stake in the hospitals, which may allow them to purchase the health system without running afoul of federal law. The Affordable Care Act and Stark act prohibits doctors from sending their patients to a hospital or facility that they owned. But the ACA has a grandfather clause that permits that ownership if it pre-dated the healthcare reform law, said Ashby Burks, a shareholder at BakerOber Health Law in Nashville.
Burks was general counsel at a hospital company that owned Lutheran before CHS and was actually a part of the deal that saw the doctors take a minority stake in the hospitals.
"I could see (the potential buyers) getting creative," Burks said. "I wouldn't say it couldn't be done."