Gundersen’s for-profit play
Logistics Health’s chief formerly on system’s board
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.