As for-prof­its stum­ble, re­gional sys­tems pick up the pieces

Modern Healthcare - - NEWS - By Dave Barkholz

When it comes to provider con­sol­i­da­tion, 2016 may well be re­mem­bered as the great un­rav­el­ing. Some of the na­tion’s largest in­vestor-owned hospi­tal sys­tems are in full re­treat as they look to re­duce debt bur­dens taken on dur­ing the past decade’s merger-and-ac­qui­si­tion binge. Even some large not-for-profit sys­tems are suf­fer­ing from in­di­ges­tion—wit­ness the on­go­ing merger talks be­tween Dig­nity Health and Catholic Health Ini­tia­tives, driven in large part by the lat­ter sys­tem’s un­sus­tain­able debt load from its ac­qui­si­tion spree.

The gi­ant in­vestor-owned hospi­tal com­pa­nies such as HCA Hold­ings, Com­mu­nity Health Sys­tems and Tenet Health­care Corp. are ei­ther sell­ing hos­pi­tals or largely stay­ing on the side­lines. Mean­while, it’s re­gional not-for­prof­its such as Mul­tiCare Health Sys­tem in Ta­coma, Wash., and Wel­lS­tar Health Sys­tem in met­ro­pol­i­tan At­lanta that are buy­ing the hos­pi­tals that the for-prof­its don’t want any­more.

These deals “are deeply strate­gic,” said Fitch Ratings Man­ag­ing Part­ner Me­gan Neuburger.

The re­gional not-for-prof­its are look­ing to grow and, per­haps, gain a statewide foot­print to bet­ter man­age pop­u­la­tions and to achieve economies of scale and more lever­age ne­go­ti­at­ing with in­sur­ers, Neuburger said. That’s per­cep­ti­bly dif­fer­ent from even two or three years ago when it was OK to add hos­pi­tals for the sake of boost­ing rev­enue and earn­ings, she said.

Franklin, Tenn.-based CHS has spent the past sev­eral months try­ing to un­wind ma­jor parts of its 60-hospi­tal, $7.6 bil­lion ac­qui­si­tion of Health Man­age­ment As­so­ci­ates in 2014. Of the eight hos­pi­tals that CHS agreed to sell in last year’s sec­ond half, four are for­mer HMA fa­cil­i­ties. Not-for-profit Cu­rae Health in Clin­ton, Tenn., is buy­ing those hos­pi­tals, three of which are in Mis­sis­sippi and the other in Florida.

CHS, which is un­der pres­sure to re­duce a $15 bil­lion wall of debt, is ne­go­ti­at­ing to sell an ad­di­tional nine hos­pi­tals. At a lun­cheon pro­gram this month in Nashville, CHS CEO Wayne Smith said the hos­pi­tals up for sale tend to be on the pe­riph­ery of ur­ban ar­eas, which is at­tract­ing in­ter­est from large not-for-prof­its for re­fer­rals and in­clu­sion in re­gional net­works. “This old ‘spoke and wheel’ con­cept that peo­ple have had through the years seems to be com­ing back,” he said.

CHS raised $1.2 bil­lion in April by spin­ning off 38 small and ru­ral hos­pi­tals into a sep­a­rate new pub­lic com­pany, Quo­rum Health. CHS, with 158 hos­pi­tals, is the na­tion’s sec­ond-largest in­vestor-owned hospi­tal com­pany by rev­enue.

Ex­ec­u­tives at the not-for-profit and for-profit health sys­tems say that the days of buy­ing hos­pi­tals for the sake of get­ting big­ger are over. Speak­ing with stock an­a­lysts in De­cem­ber, LifePoint Health CEO Bill Carpenter said the in­vestor-owned hospi­tal com­pany likely would not pur­sue any of the CHS hos­pi­tals for sale.

They don’t pro­vide a ge­o­graphic ad­van­tage for LifePoint, he said, and they al­ready are so well-run that they would of­fer lit­tle room to im­prove op­er­a­tions and earn­ings. LifePoint is the na­tion’s fourth-largest in­vestorowned hospi­tal com­pany by rev­enue.

On the other hand, Mul­tiCare, a five-hospi­tal not-for­profit sys­tem based in Ta­coma, Wash., jumped at the chance to gain a strong foothold in the east­ern part of the state when CHS put up for sale its two prof­itable hos­pi­tals in the Spokane area. In an in­ter­view in Novem­ber, Mul­tiCare CEO Bill Robert­son said pur­chas­ing CHS’ Dea­coness Hospi­tal, Val­ley Hospi­tal and mul­ti­spe­cialty Rock­wood Clinic added about $525 mil­lion in rev­enue to a Mul­tiCare sys­tem that was al­ready at $2 bil­lion.

The Spokane sys­tem, known as Rock­wood Health Sys­tem, of­fers a good con­tin­uum of acute-care and am­bu­la­tory ac­cess, giv­ing Mul­tiCare a greater statewide pres­ence. It agreed to pay CHS $425 mil­lion for the sys­tem. The deal is ex­pected to be com­pleted early this year.

Not-for-profit North­well Health is one of the most ac­tive

play­ers in a New York City mar­ket un­der­go­ing fren­zied con­sol­i­da­tion. North­well, which now has 21 hos­pi­tals af­ter adding three over the past two years, is ne­go­ti­at­ing to add a fourth hospi­tal ac­qui­si­tion, CEO Michael Dowl­ing said dur­ing re­cent J.P. Mor­gan Health­care Con­fer­ence in San Fran­cisco.

He said it’s a hospi­tal—which he de­clined to name— that joined with an­other sys­tem some years ago and now is look­ing to part­ner with a larger sys­tem that can bring physi­cians and new am­bu­la­tory ac­cess points.

Dowl­ing said as re­im­burse­ment shifts from fee-for-ser­vice to value-based pay­ments that re­quire providers to take on risk for man­ag­ing pa­tient pop­u­la­tions, there’s pres­sure to in­crease scale and ge­o­graphic reach.

“All of the ma­jor play­ers in New York are con­tin­u­ously try­ing to con­sol­i­date,” Dowl­ing said. “There are a cou­ple of hos­pi­tals in play at the mo­ment. And you have to ask your­self, if you don’t take a gam­ble on work­ing with one of them then your com­pe­ti­tion is go­ing to get it.”

North­well, based in New Hyde Park on Long Is­land, also has been gob­bling up physi­cian prac­tices in met­ro­pol­i­tan New York. Since 2010, the sys­tem has used a se­ries of ac­qui­si­tions to in­crease its em­ployed physi­cian num­ber from 1,600 to 3,900, with per­haps an­other 1,500 em­ployed physi­cians or those in in­de­pen­dent prac­tice com­ing aboard this year, Dowl­ing said. North­well’s an­nual rev­enue is about $11 bil­lion.

“On the physi­cian side, there’s been in­creas­ing con­sol­i­da­tion. I re­mem­ber not so many years ago that if you had 100 physi­cians in a group it was huge. To­day, there is a group about a half-block from my of­fice that has al­most 700 physi­cians in it,” Dowl­ing said.

The 60-physi­cian Univer­sity Physi­cians Group in New York City was one of the physi­cian prac­tices last year that agreed to join North­well. It needed cap­i­tal for in­for­ma­tion tech­nol­ogy and wanted op­er­a­tional sup­port from the large sys­tem as it pre­pares to shift from fee-for-ser­vice to value-based pur­chas­ing.

To ex­tract eq­uity from their prac­tices, doc­tors have to trade away some of their busi­ness in­de­pen­dence. In re­turn they get a sta­ble pay­check and ac­cess to the cap­i­tal to up­date their tech­nol­ogy, said at­tor­ney Phil McSween, chair­man of the health law group at Baker Donel­son, which merged with Ober Kaler a year ago. “This seg­ment has taken off,” said McSween, who is in the Nashville of­fice of the law firm.

Tenet, the na­tion’s third-largest in­vestor-owned hospi­tal com­pany, was a net seller of hos­pi­tals in 2016. Not-for-profit Wel­lS­tar Health Sys­tem of Ma­ri­etta, Ga., paid $575 mil­lion in April to buy Tenet’s five hos­pi­tals in At­lanta.

Wel­lS­tar was itch­ing to get into At­lanta’s fast-grow­ing mar­ket. And its prox­im­ity to Ma­ri­etta will al­low for some shared services. It also hopes to bring its ex­per­tise in op­er­at­ing ac­count­able care or­ga­ni­za­tions to that mar­ket, Wel­lS­tar CEO Candice Saun­ders said at the time.

At the J.P. Mor­gan con­fer­ence, Tenet CEO Trevor Fet­ter told an­a­lysts that the com­pany is try­ing to sell ad­di­tional non­core hos­pi­tals and its home health and hospice busi­ness. The Dal­las-based sys­tem in­tends to fo­cus its cap­i­tal and man­age­ment re­sources on am­bu­la­tory care and hub mar­kets where it has first- and sec­ond-place mar­ket share, Fet­ter said. Those in­clude San An­to­nio, Detroit and South Florida.

The big­gest po­ten­tial hospi­tal deal not only of 2016 but this cen­tury is brew­ing be­tween two Catholic-spon­sored not-for-prof­its, Dig­nity Health of San Fran­cisco and Catholic Health Ini­tia­tives based in En­gle­wood, Colo.

They prom­ise to an­nounce by June whether they plan to merge, en­ter into a looser af­fil­i­a­tion or stay in­de­pen­dent. A merger would com­bine Dig­nity’s $12.6 bil­lion in rev­enue with CHI’s 103 hos­pi­tals and $15.9 bil­lion in rev­enue to cre­ate the na­tion’s largest not-for-profit hospi­tal sys­tem.

Dig­nity CEO Lloyd Dean said at the J.P. Mor­gan gath­er­ing that CHI brings ge­o­graphic di­ver­sity to the talks with its hos­pi­tals spread over 22 states and dif­fer­ent in­sur­ance plans. Dig­nity op­er­ates 39 hos­pi­tals in Cal­i­for­nia, Arizona and Ne­vada. Dig­nity has ex­celled in us­ing joint ven­tures, of­ten with for-prof­its, to stretch its cap­i­tal and pro­vide more pa­tient ac­cess points in am­bu­la­tory surgery cen­ters, urgent-care lo­ca­tions and even mi­cro-hos­pi­tals. The talks, Dean said, are “not a path to get big­ger but to get bet­ter.”

Though the na­tion’s largest in­vestor-owned hospi­tal com­pany—169-hospi­tal HCA—hasn’t quite sworn off hospi­tal ac­qui­si­tions, it re­mains rel­a­tively cau­tious. Aside from ac­quir­ing the as­sets of two shut­tered fa­cil­i­ties be­long­ing to For­est Park Med­i­cal Cen­ters in the Dal­las area in 2016, Nashville-based HCA fo­cused its $2.7 bil­lion in cap­i­tal spend­ing on build­ing out clin­ics and am­bu­la­tory sites in its hub mar­kets of Mi­ami, Dal­las, Hous­ton, Tampa, Fla., San An­to­nio, Nashville and Rich­mond, Va.

The big­gest hospi­tal deal it an­nounced in 2016 was a de­ci­sion to sell its in­ter­est in Ok­la­homa Univer­sity Med­i­cal Cen­ter in Ok­la­homa City and OUMC Ed­mond to an af­fil­i­ate of the Univer­sity Hos­pi­tals Au­thor­ity and Trust. HCA reaped $750 mil­lion from the deal. St. Louis-based SSM Health, a not-for-profit, is now preparing to run the aca­demic health sys­tem.

Not-for-prof­its are smart to take ad­van­tage of the hospi­tal port­fo­lio prun­ing that the in­vestor-owned hospi­tal sys­tems have in full swing right now, said at­tor­ney Tor­rey McClary, a part­ner with Ho­gan Lovells, who was lead out­side coun­sel for Van­der­bilt Univer­sity’s 2016 spinoff of Van­der­bilt Univer­sity Med­i­cal Cen­ter in Nashville. Just be­cause a for-profit is di­vest­ing a hospi­tal “doesn’t mean it doesn’t have value to an­other op­er­a­tor,” McClary said. ●

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