Tak­ing a dif­fer­ent path

An­nual M&A report shows year of strong growth, rise of non­tra­di­tional deals

Modern Healthcare - - SPECIAL FEATURE - —with Beth Kutscher

Ex­ec­u­tives at not-for­profit hos­pi­tals are get­ting more ag­gres­sive in pur­su­ing po­ten­tial deals and also be­com­ing chum­mier with their for-profit coun­ter­parts in form­ing long-term own­er­ship part­ner­ships.

In the name of get­ting ready for a health­care re­im­burse­ment en­vi­ron­ment that places more em­pha­sis on qual­ity and con­ti­nu­ity of care and less on fee-for-ser­vice pay­ment, hospi­tal ex­ec­u­tives in­creas­ingly are seek­ing to buy or sell hos­pi­tals us­ing less-com­mon own­er­ship struc­tures, help­ing to boost the num­ber of deals in 2012.

Data col­lected for Mod­ern Health­care’s 19th An­nual Merg­ers & Ac­qui­si­tions Report show the num­ber of hospi­tal deals climb­ing more than 18% to 109 in 2012, up from 92 deals recorded for 2011.

At the same time, with 10 not-for-profit hospi­tal own­ers agree­ing to deals that change the own­er­ship of more than 160 hos­pi­tals in 2012, the num­ber of hos­pi­tals in M&A deals rose to 352, up from the 212 the pre­vi­ous year.

An­gela Humphreys, an at­tor­ney in the health­care prac­tice at Bass, Berry and Sims, says, “2012 con­tin­ued to be a year of in­creased con­sol­i­da­tion.”

Although the year had its fair share of vanilla ac­qui­si­tions of not-for-profit hos­pi­tals by not-for-profit and for-profit buy­ers, “the M&A land­scape was marked by a num­ber of non­tra­di­tional trans­ac­tions,” Humphreys says.

In­cluded in the non­tra­di­tional cat­e­gory would be ac­qui­si­tions by Duke LifePoint, the for-profit joint ven­ture part­ner­ship be­tween not-for-profit Duke Univer­sity Health Sys­tem, Durham, N.C., and LifePoint Hos­pi­tals, Brent- wood, Tenn., as well as a joint ven­ture formed be­tween for-profit Health Man­age­ment As­so­ci­ates, Naples, Fla., and not-for-profit In­te­gris Health, Ok­la­homa City, to jointly own five acute­care hos­pi­tals in Ok­la­homa.

For the board of trustees at the not­for-profit Greater Water­bury (Conn.) Health Net­work, a joint ven­ture with for-profit Van­guard Health Sys­tems, Nashville, turned out to make the most sense af­ter it de­cided to find a part­ner, says Dar­lene Strom­stad, pres­i­dent and CEO of both the net­work and its Water­bury Hospi­tal.

The net­work signed a let­ter of in­tent to form a joint ven­ture in which Van­guard owns 80% and the net­work owns 20% in a pend­ing deal. The board was seek­ing a part­ner to im­prove Water­bury’s fi­nan­cial, op­er­a­tional and clin­i­cal re­sources, while keep­ing some own­er­ship. The deal “pro­vides more of an on­go­ing lo­cal voice,” Strom­stad says.

Joint ven­tures such as Duke LifePoint, in which a not-for-profit sys­tem and a for-profit hospi­tal sys­tem get to­gether to buy hos­pi­tals, could be­come more com­mon­place over time, says James Burgdor­fer, a prin­ci­pal for Ju­niper Ad­vi­sory, an in­vest­ment bank that spe­cial­izes in health­care M&A. Such deals can be at­trac­tive for all par­ties in­volved. For ex­am­ple, trustees of a not-for-profit hospi­tal con­sid­er­ing a sale might be at­tracted to the for-profit part­ner’s fi­nan­cial and op­er­a­tional ex­per­tise and the not-for-profit’s part­ner’s clin­i­cal qual­ity and rep­u­ta­tion. And both of the buy­ers would view the deals as a way to speed growth.

Humphreys says that non­tra­di­tional hospi­tal own­ers such as in­sur­ers could con­tinue to play a larger role as providers seek to be­come more in­te­grated. Pre­vi­ous ex­am­ples in­clude three pend­ing deals in which Pitts­burgh-based in­surer High­mark plans to buy seven Penn­syl­va­nia hos­pi­tals, and the com­pleted merger be­tween in­te­grated provider HealthPart­ners, Bloom­ing­ton, Minn., and health sys­tem Park Ni­col­let Health Ser­vices, St. Louis Park, Minn.

“It’ll be in­ter­est­ing (to see) if that trend con­tin­ues in 2013, not only with High­mark but with other pay­ers,” Humphreys says.

PeaceHealth, par­ent of Sa­cred Heart in Spring­field, Ore., is part of a planned deal with a unit of Catholic Health Ini­tia­tives.

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