COVER STORY

Car­i­tas Christi, Detroit Med­i­cal Cen­ter turn to for-profit part­ners to de­liver the cash they need to mod­ern­ize and com­pete

Modern Healthcare - - Modern Healthcare -

Two not-for-profit sys­tems that badly needed ac­cess to cap­i­tal found sav­iors in for-profit in­vestors. Detroit Med­i­cal Cen­ter and Car­i­tas Christi Health Care see the moves as the best way for them to sur­vive in an in­creas­ingly com­pet­i­tive en­vi­ron­ment. “Hav­ing scale and cap­i­tal ac­cess help with changes in pay­ment and de­liv­ery re­form, which we think will be ad­dressed over the next sev­eral years,” says Keith Pitts, left, of Van­guard, which is mak­ing the of­fer for DMC.

Car­i­tas Christi Health Care in Bos­ton and Detroit Med­i­cal Cen­ter are like for­merly bro­ken-down cars that run again, but are stuck in third gear.

Both sys­tems have turned around their op­er­a­tions af­ter strug­gling fi­nan­cially. Nei­ther sys­tem, how­ever, can shift into fourth and fifth gears to ac­cel­er­ate to the high­way speeds re­quired to com­pete with the bet­ter-cap­i­tal­ized sys­tems in their mar­kets.

So th­ese not-for-profit sys­tems turned to two very dif­fer­ent for­profit me­chan­ics to re­pair those trans­mis­sions. Cer­berus Cap­i­tal Man­age­ment and Van­guard Health Sys­tems have agreed to sup­ply the trans­mis­sion fluid—hun­dreds of mil­lions of dol­lars in cap­i­tal—to lubri­cate those faulty gear boxes. Their cap­i­tal also will re­move some heavy weights that Car­i­tas Christi and DMC have been haul­ing around: their un­der­funded pen­sion plans. Cer­berus an­nounced its Car­i­tas Christi of­fer, val­ued at $830 mil­lion to $850 mil­lion, on March 25; Van­guard an­nounced its DMC of­fer, val­ued at $1.27 bil­lion, on March 19.

“I see the events of the last two weeks as trans­for­ma­tive,” said David Cyganowski, co-head of health­care in­vest­ment bank­ing and a manag­ing di­rec­tor at Cit­i­group. “I’ve been in the busi­ness since 1982, and it’s hard to re­mem­ber a cou­ple of weeks like this, both in terms of the health­care re­form law and th­ese deals.”

At the same time, some of deals that for-profit hospi­tal com­pa­nies and deal ad­vis­ers have been al­lud­ing to for months are start­ing to come to fruition, with four po­ten­tial deals an­nounced within the space of 24 hours last week. And not-for-profit hos­pi­tals aren’t just tar­gets—they are also ac­quir­ers (See re­lated story, p. 7).

Josh Nem­zoff, a trans­ac­tions con­sul­tant to not-for-profit hos­pi­tals, said both for-prof­its and not-for­prof­its are looking to make ac­qui­si­tions, but, “It’s al­ways hard to tell if this is the lead­ing edge of a wave.”

Keith Pitts, vice chair­man of Nashville­based Van­guard, noted that in 2003, Van­guard and HCA made large ac­qui­si­tions of not-for-profit sys­tems based in San An­to­nio and Kansas City, Mo., re­spec­tively, that seemed to be the start of some­thing big, and then that was it for ac­qui­si­tions of big tax­ex­empt sys­tems un­til th­ese deals.

For years, cap­i­tal avail­abil­ity to fund plant, equip­ment and tech­nol­ogy in­vest­ments has been the cru­cial ques­tion for not-for-profit hospi­tal boards con­sid­er­ing whether to sell their hospi­tal or sys­tem. The tighter credit con­di­tions that have pre­vailed since about the mid­dle of 2007 have only ex­ac­er­bated that long-stand­ing trend, health­care trans­ac­tions ad­vis­ers said.

The time is now

Not-for-prof­its seem to rec­og­nize that they need to de­cide pretty soon whether their cap­i­tal ac­cess will meet their needs, Cit­i­group’s Cyganowski said. Sys­tems with suf­fi­cient cash re­serves, good man­age­ment teams and high bond rat­ings will be able to re­main in­de­pen­dent, he said: “Those that are less for­tu­nate—they’re looking to be­come part of some­thing big­ger.”

In sig­nif­i­cant not-for-profit con­ver­sions like th­ese two deals, said Carsten Beith, a health­care in­vest­ment banker with Cain Bros., which ad­vised Car­i­tas Christi on its deal, “Cap­i­tal is al­most al­ways the pri­mary driver.” He added, “There isn’t a sys­tem in the coun­try that isn’t cap­i­tal-con­strained. You don’t need to be a dis­tressed hospi­tal to come to the con­clu­sion that a trans­ac­tion might be in the

Car­i­tas Christi and Detroit Med­i­cal Cen­ter saw an in­fu­sion of cash from for-profit in­vestors as a life­saver for their hos­pi­tals.

Cyganowski: “I see the events of the last two weeks as trans­for­ma­tive.”

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