Gun­der­sen’s for-profit play

Lo­gis­tics Health’s chief for­merly on sys­tem’s board

Modern Healthcare - - The Week In Healthcare - Me­lanie Evans

Gun­der­sen Lutheran, based in La Crosse, Wis., owns a solo hospi­tal, nearly two dozen clin­ics and a health plan. Last month, the health sys­tem bought a stake in a pri­vately held, oc­cu­pa­tional health and well­ness com­pany with Tommy Thomp­son, the for­mer HHS sec­re­tary, as its pres­i­dent. The com­pany, Lo­gis­tics Health, is also based in La Crosse and its chief ex­ec­u­tive sat on the Gun­der­sen Lutheran gov­ern­ing board for three years be­fore re­sign­ing in De­cem­ber 2009 af­ter trustees voted to buy a stake in the for-profit com­pany.

The deal al­lowed Lo­gis­tics Health to re­buff buy­out of­fers that could have jeop­ar­dized its lo­cal em­ploy­ment, said Don We­ber, the com­pany’s chair­man and CEO. We­ber said he ap­proached Gun­der­sen Lutheran ex­ec­u­tives last Oc­to­ber, as Lo­gis­tics Health sought an in­vestor to buy out its largest share­holder, TA As­so­ci­ates, a pri­vate-eq­uity firm based in Bos­ton.

He said he re­cused him­self from board meet­ings last Novem­ber and De­cem­ber and stepped down af­ter the board voted to buy a stake in Lo­gis­tics Health. We­ber said he did so to en­sure trustees could speak freely and avoid per­ceived con­flicts of in­ter­est.

The deal was Gun­der­sen Lutheran’s first en­try into pri­vate eq­uity, an in­vest­ment ve­hi­cle that of­fers greater risk but po­ten­tially high re­turns. The Wis­con­sin hospi­tal en­tered into the deal de­spite a port­fo­lio with a “tra­di­tional mix of con­ser­va­tive” in­vest­ments in an ef­fort to di­ver­sify its in­vest­ments, and pos­si­bly op­er­a­tions, said Jerry Arndt, Gun­der­sen Lutheran’s se­nior vice pres­i­dent of busi­ness ser­vices.

Arndt de­clined to dis­close how much Gun­der­sen Lutheran in­vested for its stake in the for-profit com­pany, cit­ing a con­fi­den­tial­ity agree­ment. Gun­der­sen ex­ec­u­tives are not in­vestors per­son­ally in the com­pany, only Gun­der­sen the or­ga­ni­za­tion, said spokesman Chris Stauf­fer.

The health sys­tem’s mi­nor­ity stake was enough to earn two seats on Lo­gis­tics Health’s seven-mem­ber board.

Gun­der­sen Lutheran did not buy TA As­so­ciate’s en­tire stake in the com­pany, which was not dis­closed. TA As­so­ci­ates in­vested $72.5 mil­lion in Lo­gis­tics Health in 2003.

“We think it was a good out­come for all par­ties in­volved,” Jonathan Gold­stein, a manag­ing di­rec­tor with the Cam­bridge in­vest­ment com­pany, said in an e-mail. Lo­gis­tics Health took on debt to buy shares from TA As­so­ci­ates not pur­chased by Gun­der­sen Lutheran, the com­pany said.

Michael Pere­grine, a health­care lawyer with McDer­mott Will and Emery, said in an e-mail that deals by not-for­prof­its with board mem­bers’ com­pa­nies must ad­here strictly to con­flict-of-in­ter­est poli­cies and such trans­ac­tions face in­creas­ing scru­tiny, “re­gard­less of whether it’s a ‘good deal’ or not.”

In De­cem­ber 2009, the In­ter­nal Rev­enue Ser­vice re­leased a gov­er­nance check­list and guide­lines that will be used dur­ing eval­u­a­tions of not-for-profit hos­pi­tals, which in­cludes ques­tions about con­flict-of-in­ter­est poli­cies and how well or­ga­ni­za­tions fol­low them.

Pere­grine also noted that al­ter­na­tive in­vest­ments, in­clud­ing pri­vate eq­uity, among not-for-profit hos­pi­tals have also at­tracted in­creas­ing at­ten­tion from reg­u­la­tors and credit an­a­lysts dur­ing the eco­nomic down­turn. Some have ques­tioned whether not-for­profit boards and ex­ec­u­tives have the abil­ity to man­age the more so­phis­ti­cated in­vest­ments, he said.

Arndt said the sys­tem hired bank­ing, le­gal and au­dit con­sul­tants to an­a­lyze the in­vest­ment. He said Gun­der­sen Lutheran closely an­a­lyzed its bal­ance sheet to gauge how the Lo­gis­tics Health in­vest­ment would af­fect key fi­nan­cial met­rics for credit an­a­lysts and lenders.

The sys­tem con­sid­ered the deal as a chance to pro­mote the lo­cal econ­omy and might of­fer Gun­der­sen Lutheran chances to ex­pand its op­er­a­tions at a time when hos­pi­tals face fi­nan­cial pres­sure and un­cer­tainty from health­care re­form, Arndt said. Lo­gis­tics Health pro­vides health and well­ness screen- ings across the U.S. to gov­ern­ment clients and cor­po­ra­tions, he noted.

Gun­der­sen’s stake in the for-profit com­pany is viewed in part as an op­por­tu­nity to di­ver­sify and in­vest in a rapidly grow­ing health­care busi­ness with re­turns that out­pace its port­fo­lio, Arndt said.

Gun­der­sen Lutheran’s $353 mil­lion port­fo­lio was di­vided among eq­ui­ties (29%), U.S. Trea­suries and agency obli­ga­tions (28%), mort­gage and as­set-backed in­vest­ments (21%), cor­po­rate se­cu­ri­ties (9%), and all other in­vest­ments (13%) at the close of 2008, the most re­cent year for which fig­ures are avail­able.

Re­bound­ing stock mar­kets and cash from op­er­a­tions pushed the port­fo­lio to $408 mil­lion as of the end of Septem­ber, said Daryl Ap­ple­bury, Gun­der­sen Lutheran’s chief fi­nan­cial of­fi­cer. Ap­ple­bury said the gov­ern­ing board will con­sider whether to ad­just its port­fo­lio to ac­com­mo­date the pri­vate eq­uity deal and re­turn­ing eq­uity mar­kets within its in­vest­ment pol­icy guide­lines.

Gun­der­sen Lutheran’s move into pri­vate eq­uity comes as other sys­tems are re­con­sid­er­ing the in­vest­ment ve­hi­cle. In­vestors can­not typ­i­cally cash out pri­vate eq­uity as read­ily as other as­sets and ready ac­cess to cash has grown in­creas­ingly im­por­tant since the credit cri­sis, said Christo­pher La Marca, health­care in­vest­ments di­rec­tor with SEI In­vest­ments’ in­sti­tu­tional group.

Pri­vate eq­uity pro­duced an av­er­age re­turn of neg­a­tive 5.6% in fis­cal 2008 among health­care or­ga­ni­za­tions sur­veyed by Com­mon­fund, which man­ages in­vest­ments for not-for-prof­its; that’s com­pared with the more dra­matic down­turn among do­mes­tic and in­ter­na­tional eq­ui­ties, which had av­er­age re­turns of neg­a­tive 37.4% and neg­a­tive 41%, re­spec­tively. The Com­mon­fund sur­veys of health­care or­ga­ni­za­tions for fis­cal 2007 re­ported av­er­age pri­vate-eq­uity re­turns of 17.7% com­pared with 6.3% for do­mes­tic eq­ui­ties and 12.1% for in­ter­na­tional eq­ui­ties. For 2006, the av­er­age pri­vate-eq­uity re­turn was 11.3%; do­mes­tic eq­ui­ties, 13.9%; and in­ter­na­tional eq­ui­ties, 24.7%

Pri­vate-eq­uity in­vest­ments by in­sti­tu­tional in­vestors are typ­i­cally done through pri­va­tee­quity man­agers as part of a di­ver­si­fied fund, but some large health­care or­ga­ni­za­tions have got­ten into the game.

As­cen­sion Health, St. Louis, the na­tion’s largest Ro­man Catholic health sys­tem, along with two other Catholic health sys­tems, op­er­ate a pri­vate-eq­uity fund.

Arndt: Deal made to di­ver­sify in­vest­ments, pos­si­bly op­er­a­tions.

We­ber says he re­cused him­self from board meet­ings.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.