Stand-alones suf­fer­ing

Small hos­pi­tals find­ing fewer op­tions

Modern Healthcare - - THE WEEK IN HEALTHCARE - Beth Kutscher

Scott County, Tenn., a com­mu­nity of 22,000 peo­ple about an hour north­west of Knoxville, has been with­out a hos­pi­tal for the past year, but the Oneida-based med­i­cal cen­ter may soon be re­opened. County of­fi­cials are clos­ing in on a deal that would re­open the 25-bed fa­cil­ity af­ter it was forced to sus­pend op­er­a­tions last May. The hos­pi­tal’s clo­sure il­lus­trates what may be­come in­creas­ingly com­mon across the coun­try as deep-pock­eted sys­tems be­come choosier about what they buy and stand­alone hos­pi­tals find it harder to go it alone. Fa­cil­i­ties that can’t find larger part­ners have few fall­back op­tions. Scott County Hos­pi­tal shut its doors af­ter pre­vi­ous owner Health Man­age­ment As­so­ciates failed to find a buyer for the fa­cil­ity. Naples, Fla.-based HMA as­sumed the lease on the hos­pi­tal as part of its $525 mil­lion pur­chase of Mercy Health Part­ners-Ten­nessee from Catholic Health Part­ners, Cincinnati, but did not in­tend to op­er­ate it.

Trey Crabb, man­ag­ing di­rec­tor at in­vest­ment bank Ziegler, calls it the plight of small hos­pi­tals. Sin­gle hos­pi­tals with less than $75 mil­lion in net pa­tient rev­enue are in dan­ger of be­com­ing ex­tinct, he said, as they’re too small to be in­ter­est­ing to larger chains look­ing to build mar­ket share in the places where they al­ready are. “It doesn’t move the nee­dle,” he said.

It’s not as if fi­nanc­ing has dried up for ac­qui­si­tions, said Mark Claster, pres­i­dent of con­sult­ing firm Carl Marks & Co. “In­stead, many M&A tar­gets aren’t as at­trac­tive as they pre­vi­ously were—and this is based upon the changes in the way hos­pi­tals are do­ing busi­ness, get­ting paid and other ex­ter­nal forces and pres­sures they are fac­ing.”

Hos­pi­tals as they cur­rently op­er­ate are “a dy­ing busi­ness,” Claster said. Changes in health­care de­liv­ery—and de­clin­ing in­pa­tient ad­mis­sions—mean that providers have to be not just acute-care fa­cil­i­ties, but in­te­grated de­liv­ery sys­tems.

Large re­gional sys­tems may still find some smaller hos­pi­tals at­trac­tive if those fa­cil­i­ties in­crease their catch­ment area and draw ad­di­tional pa­tients into their net­works. Yet many ru­ral com­mu­ni­ties of­fer limited op­por­tu­ni­ties to grow mar­ket share as they face a stag­nant or even de­clin­ing pa­tient base, said Tony Kong, di­rec­tor at man­age­ment and tech­nol­ogy con­sult­ing firm West Mon­roe Part­ners.

In ad­di­tion, many would-be con­sol­ida­tors are tak­ing a breather from the ram­pant buy­ing spree of the past few years as they con­sider their next move. “Start­ing this year, in Q1, there’s been a sig­nif­i­cant slow­down,”

Kong said. “I think ev­ery­one is be­com­ing a bit more se­lec­tive.”

In Scott County, the hos­pi­tal’s clos­ing on May 24, 2012, has meant pa­tients must make the 55-minute trip to North Knoxville Med­i­cal Cen­ter, an­other HMA fa­cil­ity, for emer­gency care, putting “ma­jor wear and tear on the am­bu­lances,” said Mayor Jeff Tibbals.

But of­fi­cials never stopped look­ing for a part­ner. And at a March spe­cial-ses­sion meet­ing, the county’s board of com­mis­sion­ers voted unan­i­mously in fa­vor of al­low­ing Pi­o­neer Health Ser­vices, a for­mer suitor, to sub­mit a new let­ter of in­tent to ac­quire the fa­cil­ity.

The state at­tor­ney gen­eral re­ceived the as­set pur­chase agree­ment last week and the ap­proval process is ex­pected to take 45 days. “We’re al­most there,” Tibbals said. The tar­get date to re­open the hos­pi­tal is July 1.

Scott County may well be one of the lucky ones. Across the coun­try, hos­pi­tals that fail to find buy­ers are find­ing that they have no choice but to shut their doors.

Two other ru­ral fa­cil­i­ties in Ge­or­gia have also sus­pended op­er­a­tions this year: 25-bed Ste­wart-Web­ster Hos­pi­tal in Rich­land and 25-bed Cal­houn Me­mo­rial Hos­pi­tal in Ar­ling­ton.

A re­port last month from Moody’s In­vestors Ser­vice showed that five of the six hos­pi­tals down­graded last quar­ter had rev­enue un­der $500 mil­lion. Small hos­pi­tals, the credit rat­ings agency said, are par­tic­u­larly vul­ner­a­ble be­cause they lack the scale to ne­go­ti­ate with pay­ers and ven­dors, and are overly re­liant on a few physi­cians, who would be dif­fi­cult to re­place if they left.

Ru­ral hos­pi­tals can ap­ply for fed­eral fund­ing to help them stay in busi­ness, Kong noted. Yet he has not yet run across a hos­pi­tal that has been suc­cess­ful in tak­ing ad­van­tage of the fed­eral pro­gram.

Tibbals de­nies that be­ing a small, ru­ral hos­pi­tal made the search for a part­ner more chal­leng­ing. He said the county talked to seven-hos­pi­tal Covenant Health as well as the Univer­sity of Ten­nessee, both in based in Knoxville. “UT said it didn’t fit their model, but they helped along the way,” he said.

When Scott County orig­i­nally se­lected Pi­o­neer in 2011, the group couldn’t agree on fi­nan­cial terms with HMA, Tibbals said. Af­ter its clo­sure, Scott County then tried to se­cure a deal with S.M. Promen, but the startup ul­ti­mately couldn’t pro­vide ad­e­quate proof of net worth to op­er­ate the hos­pi­tal.

Based in Magee, Miss., Pi­o­neer’s en­tire busi­ness model is based on run­ning ru­ral fa­cil­i­ties. The six-hos­pi­tal sys­tem did not re­spond to a re­quest for comment.

At this point, it is get­ting a bar­gain. The only fi­nan­cial com­mit­ment of the deal re­quires Pi­o­neer to pay off a $106,000 loan on the med­i­cal of­fice build­ing, Tibbals noted. “We’re giv­ing it away to Pi­o­neer Health Ser­vices,” he said.

Hos­pi­tals as they cur­rently op­er­ate are “a dy­ing busi­ness.”

—Mark Claster, Carl Marks & Co.

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