HCA finalizes Mission Health purchase
(Updated at 4:20 p.m. ET)
With little apparent regulatory interference, investor-owned HCA Healthcare closed on the $1.5 billion purchase of not-for-profit Mission Health on Friday, less than one year after the two providers signed their letter of intent.
The deal wasn't an easy sell for locals currently served by six-hospital Mission, based in Asheville, N.C., many of whom feared the Nashville-based hospital giant would raise prices and shutter rural hospitals or services. To ease concerns, HCA agreed to a number of promises, including keeping the hospitals open for 10 years and building a 120-bed inpatient behavioral health hospital in Asheville.
"This is a tremendous win for the people and communities that we serve, and one that will be judged by history as a positive inflection point for the communities we serve," Mission CEO Dr. Ronald Paulus said in a statement. "We've not only provided for the long-term sustainability of high-quality healthcare and secured special protections for our rural communities, we've also created the largest per capita foundation in the nation to address the social determinants of health."
The deal got an important green light last month from North Carolina's attorney general, who can pursue legal action if HCA breaks its commitments. HCA wrote in a news release it has provided assurance that "certain healthcare services will be maintained."
HCA has promised to build a new replacement hospital for Angel Medical Center in Franklin, N.C. and complete the new Mission Hospital for Advanced Medicine in Asheville. It will create a $25 million innovation fund dedicated to improving healthcare service delivery and spurring economic development. HCA has also committed to spending $232 million in capital investments on Mission facilities, not including the behavioral health hospital or the replacement hospital in Franklin.
HCA now has 185 hospitals in 21 states, including North Carolina, where it did not do business previously. Mission, which did not make a representative available for comment, fits with HCA's longstanding strategy of scooping up facilities that dominate their markets, which helps the company negotiate better rates with health insurers. Mission holds a 49.5% market share across the 11 counties it operates in.
Industry experts say it's no coincidence the deal follows the lifting of legal restrictions in 2016 that prevented Mission from raising prices. To avoid a federal antitrust challenge when two competing Asheville hospitals merged to form Mission, state officials issued a mandate in 1995 that limited how much Mission could increase its cost per case and precluded its operating margin from growing above a specific amount.
Barak Richman, a law professor at Duke University, said the way he sees it, Mission carved out a monopolistic position through its agreement with the state. Now that that's gone, Mission is "selling its monopoly position to the for-profit entity."
HCA's market strategy tends to be strictly focused around hospitals rather than investing in outpatient physician practices, Richman said. That doesn't bode well for the industry's current evolution toward preventive health and meeting people's needs before they must be hospitalized, he said.
Unfortunately, one of the "real tragedies" in North Carolina is the lack of access to quality, low-cost outpatient care, Richman said. In a number of counties, hospitals are the only option, and they're the most expensive and often the lowest quality, he said.
"In HCA, the H is for hospital, it's not for healthcare," Richman said. "I'm not certain it's in their DNA to be able to manage that transition—but maybe."
Mission CEO Dr. Ronald Paulus told Modern Healthcare in April 2018 that the lifting of the state restrictions, which he said he requested the day he arrived at Mission in 2010, was not a factor in HCA's interest.
The net proceeds of the deal will go to a newly formed not-for-profit organization called the Dogwood Health Trust, which leaders say is dedicated to making significant investments in partnerships that will study and address core social determinants of health in Western North Carolina. The trust expects to begin grant funding for approved initiatives as early as 2020.
The deal's closure also means Mission will place $15 million into each of its six, hospital-level foundations, including one that will be created for Angel Medical Center. The foundations will no longer be able to direct their money directly to the hospitals, now that they're owned by HCA. Instead, they'll likely need to refocus their strategy toward addressing community needs.
Under the deal, Mission will adopt HCA's charity care policy, which HCA said in a news release is "more expansive." An HCA hospital website says it has an "expanded charity policy that may reduce the amount you owe" for patients whose incomes fall between 201% and 400% of the federal poverty level and whose bills exceed $1,500. In most cases, patients whose incomes fall between 0% and 200% of the federal poverty level will receive a 100% discount on their bills, according to the policy. In 2019, a one-person household with an income of $24,980 would be at 200% of the federal poverty level. A one-person household with an income of $49,960 would put that person at 400%.
The acquisition means Mission will now call municipal bonds the system issued in 2017 priced at a premium that have since dropped significantly in value on news of the HCA deal. Investors have criticized Mission for not disclosing its talks with HCA. Mission has responded that when the bonds were sold, Mission was not having any material discussions with HCA.
Bill Oliver, industry and media liaison with the National Federation of Municipal Analysts, said the situation has prompted municipal investors to be more cautious in reading through the bond documents.
"People will incorporate it into their research process," he said. "With this having happened, the assumption is you may see it again sometime for some reason."
Mission is HCA's largest not-for-profit acquisition—excluding providers it already held stakes in—since its 2003 purchase of nine-hospital Kansas City, Mo.-based Health Midwest for $1.1 billion.
In HCA's fourth quarter 2018 earnings call Tuesday, CFO Bill Rutherford said the company projects about 1 percentage point of its anticipated earnings growth in 2019 will come from the Mission acquisition, and another 2 percentage points from deals that closed in 2017 and 2018. HCA's new CEO, Sam Hazen, made it clear the hospital chain is still hungry for more deals this year, although it's unclear they'll be the same caliber as "market makers" like Mission.
HCA drew $3.8 billion in net income in 2018, up significantly from $2.2 billion in 2017. Its revenue totaled $46.7 billion, up 7% from 2017.
HCA representatives declined to comment for this article, but in a statement, Hazen said he's excited Mission has joined the company.
"We're looking forward to investing in western North Carolina and helping ensure Mission Health's 133-year tradition of caring for communities throughout the region continues for many years," he said.
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