Duke LifePoint makes moves to ex­pand na­tion­ally

Duke Lifepoint reaches across U.S.

Modern Healthcare - - NEWS - Beth Kutscher

Duke LifePoint marked the start of an ag­gres­sive, na­tion­wide ex­pan­sion strat­egy for the two-year-old joint ven­ture when it inked a deal to ac­quire a hospi­tal on Michi­gan’s Up­per Penin­sula. The ad­di­tion of Mar­quette (Mich.) Gen­eral Health Sys­tem, 1,100 miles from Duke Univer­sity Med­i­cal Cen­ter—which holds a small stake and brings its name and clin­i­cal ex­per­tise to the ven­ture—also will test whether a univer­sity health sys­tem could play on the same turf as its in­vestorowned peers.

Part­ner­ships among for­profit and not-for-profit sys­tems are noth­ing new—nor is it un­usual for an aca­demic med­i­cal cen­ter to forge clin­i­cal af­fil­i­a­tions with hos­pi­tals hun­dreds of miles away. But groups such as the Mayo Clinic Care Net­work, which was launched in 2011 and now has 12 mem­bers, are about ex­tend­ing ex­per­tise on clin­i­cal mat­ters, not own­er­ship.

Un­der the Duke LifePoint agree­ment, Duke Univer­sity Health Sys­tem re­ceives a 3% in­ter­est in the ini­tial eq­uity of each hospi­tal ac­qui­si­tion and does not have to put up any cap­i­tal to fund the deals, ac­cord­ing to fi­nan­cial state­ments filed to bond­hold­ers.

For its fis­cal 2012 ended June 30, the sys­tem re­ported just $754,000 in non­cur­rent as­sets re­lated to its in­vest­ment in the joint ven­ture.

The part­ner­ship is a chance for Duke to ex­tend its brand—and tap into a new rev­enue stream—while min­i­miz­ing its fi­nan­cial risk.

But the ex­per­i­ment does carry rep­u­ta­tional risks, as Duke needs to show that it can fran­chise its core strengths and that its reach ex­tends be­yond the cor­po­rate let­ter­head.

Dr. Bill Fulkerson, ex­ec­u­tive vice pres­i­dent of Duke Univer­sity Health Sys­tem, noted that the joint ven­ture is just be­gin­ning to forge a na­tional strat­egy and de­vel­op­ing new clin­i­cal pro­grams is “part of our mis­sion.”

“The main con­cern is not about di­lut­ing the brand, but about scal­ing our prod­uct,” Fulkerson said. “Our name is more im­por­tant than just about any­thing else. That’s our com­mit­ment—that you’re get­ting Duke.”

Durham, N.C.-based Duke launched its joint ven­ture with pub­licly traded LifePoint Hos­pi­tals, Brent­wood, Tenn., in Jan­uary 2011 with the ac­qui­si­tion of 102-bed Maria Parham Med­i­cal Cen­ter, Hen­der­son, N.C.

Since then, the group has added 50-bed Per­son Me­mo­rial Hospi­tal, Roxboro, N.C., and 86-bed Twin County Re­gional Health­care, Galax, Va. The 812-bed aca­demic med­i­cal cen­ter draws re­fer­ral busi­ness from the smaller hos­pi­tals, all within 150 miles of its main cam­pus.

But it was the July deal for 276-bed Mar­quette Gen­eral that was a turn­ing point for the joint ven­ture—sig­nal­ing its in­ten­tion to be not only a re­gional health net­work, but also a na­tional one, where poten- tially ev­ery re­gion of the coun­try is ripe with tar­gets.

Leif Murphy, ex­ec­u­tive vice pres­i­dent and chief devel­op­ment of­fi­cer at LifePoint, said the joint ven­ture has a list of 50 “per­fect can­di­dates” to pur­sue, which he de­scribed as hav­ing a rep­u­ta­tion for qual­ity but in need of ad­di­tional cap­i­tal to meet the de­mands for tech­nol­ogy and clin­i­cal up­grades. Duke LifePoint, he said, is fo­cus­ing on hos­pi­tals in the south­east re­gion stretch­ing as far as east­ern Ten­nessee and South Carolina, but also ma­jor acute-care hos­pi­tals that could be lo­cated any­where.

LifePoint CEO Bill Car­pen­ter de­clined to quan­tify how many deals he ex­pects to pur­sue this year, but noted that LifePoint has ac­quired $500 mil­lion in new rev­enue with the joint ven­ture’s four buys with the po­ten­tial to con­tinue on that scale.

The na­tional deals the joint ven­ture plans to tar­get will be dis­tinct from the com­mu­nity hos­pi­tals the in­vestor-owned chain usu­ally pur­sues. In­stead, it is look­ing for ter­tiary-care cen­ters that have strength in Duke’s core pro­grams—car­di­ol­ogy, on­col­ogy, neona­tol­ogy and sports medicine—but lack an aca­demic part­ner.

“Mar­quette is a good ex­am­ple of what we think is pos­si­ble for Duke LifePoint,” Car­pen­ter said. “They have the abil­ity to ben­e­fit from the ex­per­tise that Duke brings in that area.”

More ac­qui­si­tions are likely to fol­low in Michi­gan’s Up­per Penin­sula as Duke LifePoint at­tempts to build a re­gional net­work of hos­pi­tals that will re­fer more com­plex pa­tients to Mar­quette. Car­pen­ter noted that the goal is to have pa­tients treated closer to home rather than travel to 759-bed Henry Ford Hospi­tal in Detroit or the Mayo Clinic in Rochester, Minn., for care.

“What we’ve put to­gether at Duke LifePoint is the abil­ity to im­prove clin­i­cal out­comes with Duke’s abil­ity to pro­vide care at the low­est cost set­ting,” Car­pen­ter said.

The joint ven­ture may also ac­quire an­cil­lary care cen­ters that com­ple­ment the acute-care hos­pi­tals in the net­work, Murphy said. “The en­tire con­tin­uum of care is up for con­sid­er­a­tion.”

Of­fi­cials from Duke and LifePoint have been quick to em­pha­size that Duke’s involvement in the joint ven­ture is larger than its eq­uity in­ter­est might sug­gest.

Trey Crabb, man­ag­ing di­rec­tor at in­vest­ment bank Ziegler, noted that hav­ing Duke on board gives the joint ven­ture an edge. “Duke is along for what they do best, which is the clin­i­cal piece,” he said.

Ter­tiary-care hos­pi­tals need ac­cess to cap­i­tal—and if they still har­bor any bias against for-profit sys­tems, Duke’s pres­tige is sup­posed to smooth any lin­ger­ing doubts. In that way, the tie-up is in­tended to cap­i­tal­ize on the strengths of each part­ner: LifePoint’s op­er­at­ing ef­fi­ciency and abil­ity to raise cap­i­tal, Duke’s clin­i­cal prow­ess and es­teemed rep­u­ta­tion.

In a seller’s mar­ket, “it’s not all about money; some­times it’s about struc­ture, gov­er­nance and fit,” Crabb said.

LifePoint Hos­pi­tals doesn’t have a brand, some­thing it read­ily

ac­knowl­edges and takes prides in. It con­sid­ers its Brent­wood, Tenn., base a “hospi­tal help cen­ter” rather than its cor­po­rate head­quar­ters.

That’s where Duke comes in. “Their brand car­ries with it the qual­ity and clin­i­cal ex­per­tise that they’re well-known for,” Car­pen­ter said. “They were very care­ful to pro­tect the Duke brand.”

Be­fore they formed their joint ven­ture, the two sys­tems tested the wa­ters when LifePoint’s Danville (Va.) Re­gional Med­i­cal Cen­ter brought in Duke to run the car­dio­vas­cu­lar ser­vice line at the 151-bed fa­cil­ity.

Other re­gional hos­pi­tals took note. And when Twin County Re­gional Health­care un­der­took an 18-month due-dili­gence process to find a buyer, it had both Duke and LifePoint on an ini­tial list of 28 po­ten­tial part­ners.

“We were find­ing it in­creas­ingly chal­leng­ing to re­main vi­able as a com­mu­nity hospi­tal,” said Pres­i­dent and CEO Jon Ap­pel­baum, who noted that sys­tems came and gave a joint pre­sen­ta­tion. “The guid­ing prin­ci­ple with Duke LifePoint is cre­at­ing a place where pa­tients want to come for care.”

In a deal that closed April 1, LifePoint, through the joint ven­ture, paid $20 mil­lion for an 80% stake in Twin County and com­mit­ted an­other $20 mil­lion for cap­i­tal ex­pen­di­tures over the next 10 years, ac­cord­ing to LifePoint’s stock ex­change fil­ings. The com­pany also contributed $3 mil­lion to­ward physi­cian re­cruit­ment ef­forts.

Ap­pel­baum said the hospi­tal has now in­vested in dig­i­tal mam­mog­ra­phy, video en­doscopy and wire­less com­mu­ni­ca­tion sys­tems. “I’m con­fi­dent that we will be able to mea­sure sig­nif­i­cant gains in all mea­sures of pa­tient safety and pa­tient care,” he said.

Duke had be­come ac­cus­tomed to re­ceiv­ing in­quiries from com­mu­nity hos­pi­tals that were strug­gling to go it alone. But Fulkerson said he was “a lit­tle sur­prised” when he learned that LifePoint had been look­ing at Mar­quette—and even more sur­prised that Mar­quette had an in­ter­est in work­ing with Duke.

Mar­quette Gen­eral Health Sys­tem al­ready had an af­fil­i­a­tion in place with seven other part­ners in the Up­per Penin­sula when it started to look for a buyer. The al­liance was in­tended to help pre­pare for the chal­lenges of health­care re­form, in­clud­ing set­ting up an ac­count­able care or­ga­ni­za­tion.

But lo­cal af­fil­i­a­tions “wouldn’t change any­thing for us in terms of ac­cess to cap­i­tal,” said Judy Wat­son-Ol­son, vice chair­woman of the hospi­tal board.

So in Septem­ber 2011, Mar­quette se­lected a fi­nan­cial ad­viser that helped whit­tle down a list of 26 po­ten­tial com­pa­nies—both for-profit and not-for-profit, in­side and out­side Michi­gan—that could be po­ten­tial part­ners.

Gary Muller, Mar­quette’s pres­i­dent and CEO, noted that the three physi­cians on the search com­mit­tee of about a half-dozen peo­ple were in­stru­men­tal in se­lect­ing Duke LifePoint. “The physi­cians liked the (ac­cess to cap­i­tal) but, boy, did they like the qual­ity.”

As part of the deal, which closed Sept. 1, LifePoint paid $132.7 mil­lion in cash for the sys­tem and com­mit­ted an­other $350 mil­lion to in­vest in cap­i­tal im­prove­ments and physi­cian re­cruit­ment.

Joint ven­tures be­tween for-profit and not-for-profit sys­tems date back as far as the 1996 part­ner­ship be­tween HCA, Nashville and St. David’s Hospi­tal, Austin, Texas. “It was a very con­tro­ver­sial ap­proach at the time,” said Chris Je­drey, a health­care M&A at­tor­ney at law firm McDermott, Will & Emery.

Push­back from the In­ter­nal Rev­enue Ser­vice to limit th­ese types of deals—in­clud­ing a sub­se­quent le­gal fight over St. David’s tax-ex­empt sta­tus—also had a chill­ing ef­fect.

“There’s been a re­vival of joint ven­ture deals,” Je­drey said. “At this point, the mar­ket is much more ac­cept­ing of this fact. … A lot of this is driven by ac­cess to cap­i­tal.”

Aca­demic med­i­cal cen­ters in par­tic­u­lar have an ed­u­ca­tional and re­search mis­sion that re­quires ac­cess to larger num­bers of pa­tients and pa­tient rev­enue, Je­drey noted. He added, though, that op­er­at­ing in mul­ti­ple mar­kets has not been a stan­dard com­po­nent of th­ese deals.

“I think this is a chang­ing land­scape, the def­i­ni­tion of where th­ese aca­demic med­i­cal cen­ters play and how they use their brands,” said R. Lawrence Van Horn, ex­ec­u­tive di­rec­tor of health af­fairs and as­so­ciate pro­fes­sor at Van­der­bilt Univer­sity’s Owen Grad­u­ate School of Man­age­ment. “Duke is a lit­tle bit out in front of this, but I wouldn’t be sur­prised if we started to see other aca­demic med­i­cal cen­ters build­ing their brand, build­ing their re­fer­ral busi­ness.”

Van Horn noted that po­ten­tial chal­lenges in­clude cul­tural dif­fer­ences be­tween the part­ners as well as be­ing able to con­vince pa­tients and clin­i­cians that the aca­demic med­i­cal cen­ter is along for more than just mar­ket­ing pur­poses. “You have to be able to fran­chise that de­liv­ery model,” Van Horn said.

Other aca­demic med­i­cal cen­ters are al­ready fol­low­ing suit. In Septem­ber, Tufts Med­i­cal Cen­ter, Bos­ton, said it was part­ner­ing with Van­guard Health Sys­tems, Nashville, and a physi­cian net­work in Mas­sachusetts to form a new sys­tem that would also seek ac­qui­si­tions.

“I would say ev­ery ma­jor aca­demic med­i­cal cen­ter in the U.S. has been con­tacted by … com­pa­nies look­ing to do the same thing,” Ziegler’s Crabb said. “That’s a given.”

The ac­qui­si­tion of Mar­quette Gen­eral Health Sys­tem, pic­tured, marks the be­gin­ning of Duke LifePoint’s na­tion­wide ex­pan­sion.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.