MedCath pon­ders sale of whole com­pany or its parts

MedCath in bind af­ter slow re­ac­tion to changes

Modern Healthcare - - News - Jes­sica Zig­mond

Change and a slow strat­egy for deal­ing with it may have led MedCath Corp. to con­sider ei­ther a sale of the com­pany or of its in­di­vid­ual hos­pi­tals and as­sets, in­dus­try watch­ers said.

Late last year, Char­lotte, N.C.-based MedCath en­gaged Nav­i­gant Cap­i­tal Ad­vi­sors to help the com­pany eval­u­ate al­ter­na­tives that would cre­ate share­holder value, said O. Ed­win French, the com­pany’s pres­i­dent and CEO. On March 1, the com­pany said a com­mit­tee of in­de­pen­dent direc­tors will work with Nav­i­gant to de­cide whether to sell MedCath in whole or in part, and that Ed­ward Casas, a se­nior manag­ing di­rec­tor at Nav­i­gant, re­signed vol­un­tar­ily from MedCath’s board. French said the com­pany does not have a dead­line for mak­ing a de­ci­sion.

The news came just two weeks af­ter St. David’s Health­Care—a joint ven­ture be­tween HCA and St. David’s Foun­da­tion—an­nounced its pur­chase of 58bed Heart Hospi­tal of Austin from MedCath (which owned a 70.9% stake) and physi­cian in­vestors for $83.6 mil­lion (Feb. 22, p. 20).

Ac­cord­ing to French, MedCath saw the po­ten­tial to di­ver­sify away from heart care and has in­vested heav­ily in its hos­pi­tals by ex­pand­ing emer­gency de­part­ments, adding di­ag­nos­tic imag­ing, and adding beds that aren’t solely for heart pa­tients. But this strat­egy may have been a case of too lit­tle, too late.

“As they be­come cog­nizant that their suc­cess would lead them to other, non­car­dio­vas­cu­lar ser­vices, they needed to have more sup­port in the physi­cian com­mu­nity to be suc­cess­ful with that,” said Dar­ren Lehrich, who serves as manag­ing di­rec­tor at Deutsche Bank Se­cu­ri­ties. “They put all their eggs in one bas­ket with the part­ner­ship model and then tried to di­ver­sify and got caught short without enough sup­port in the mar­ket­place to be suc­cess­ful with di­ver­si­fi­ca­tion.”

Lehrich iden­ti­fied what he called two “mega­trends” that have af­fected MedCath: first is the re­cent shift in the car­dio­vas­cu­lar busi­ness away from in­pa­tient to out­pa­tient pro­ce­dures.

The sec­ond trend is the hospi­tal em­ploy­ment model, in which lo­cal hos­pi­tals and health sys­tems are em­ploy­ing not only pri­mary-care physi­cians but also spe­cial­ists.

“MedCath in some cases is be­ing squeezed out of that physi­cian value stream due to some of this em­ploy­ment,” Lehrich said. “The case in point was the Austin deal, where HCA’s St. David’s part­ner­ship ac­quired the lead car­di­ol­ogy group at the hospi­tal that MedCath owns, and MedCath was left with no other op­tion but to sell.”

In Fe­bru­ary, MedCath re­ported rev­enue of $147.3 mil­lion for the three months ended Dec. 31, 2009, down about 2% from the $150.2 mil­lion it re­ported in the same pe­riod a year ago. But the com­pany’s 2009 an­nual rev­enue in­creased from the prior year as the com­pany re­ported to­tal rev­enue of $602 mil­lion for the year ended Sept. 30, 2009, up 1.8% com­pared with $591.6 mil­lion for the same pe­riod in 2008. Af­ter the Austin sale, MedCath owns an in­ter­est in and op­er­ates nine hos­pi­tals in seven states.

French: MedCath saw a po­ten­tial to di­ver­sify.

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