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January 23, 2012

Catholic Healthcare West Drops Church Affiliation

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In a move I wouldn’t be surprised to see imitated, big religious hospital chain Catholic Healthcare West has broken its official ties with the Roman Catholic Church, though it will continue to include both Catholic and non-Catholic facilities in its flock.   The chain, which is changing its name to Dignity Health, currently includes 15 non-Catholic hospitals and 25 Catholic hospitals.

The system’s leaders have concluded that they couldn’t meet their ambitious growth targets if forced to adhere to faith-based care guidelines in all of its facilities.

According to CEO and president Lloyd Dean, who spoke to USA Today, he’s had to step away from potential deals several times when partners questioned their role in a Catholic system. This way, it should be much easier for CHW to work with other systems and acquire medical practices, observers say.

I expect to see other faith-based chains consider similar moves over the next year or two. As we’ve noted in this forum before, having to adhere to religiously-based rules can be a bit of a hassle for secular organizations, especially those that hope to compete in tight markets.  Mergers between the two sides can become a Tylenol headache very quickly.

Consider the struggles the University of Louisville (KY) went through in an effort to merge with Catholic-owned St. Mary’s Healthcare, forcing it propose build a “hospital in a hospital” to provide forbidden services. It makes my eyes water just to think about it. With health reform afoot, mergers a fact of life and new partnership models emerging every day, CHW may have done the only thing it could do.

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December 19, 2011

Small-Hospital Mergers A Signal That Crisis Is Upon Us

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If you’re wondering how healthy an industry is, look at how many smaller players are selling out. And if the smaller players are bailing like rats from the proverbial ship, consider that industry to be in crisis. That’s my theory, anyway. Read on and see if you agree.

You know, when I watched Community Health Systems and HCA and Tenet doing their little dances on the catwalk a few years ago, tendering offers and buying up sinking ships, I thought hey, that’s what big chains do. Didn’t register much.

One year ago, when I watched VC firm Cerberus Capital Management pick up Boston’s Caritas Christi chain, I saw signs of hospital desperation. After all, VC firms don’t sink their money into companies that offer a small, predictable return;  in this case, they acquired financially distressed properties with a very substantial upside.

So, what of this year?  Merger mania continues $7.3 billion of total healthcare-related M&A this year. (For more background, check out this hospital M&A list from business information provider Hoover’s. It’s been a wild year, and next year is likely to keep up the pace.

I’m not really surprised by the merger mess, and I doubt you are either. After all, hospitals have been running at minimal or even negative margins for many years, and now that health reform is breathing down everyone’s necks the pressure is climbing. The question is what this means for the industry.

Consider that one John Reiboldt of investment bank Coker Capital Advisers called the single stand-alone hospital a “concept of the past” at this year’s HIMSS event. Even if he’s wrong — or ahead of himself — the folks in his industry  are clearly poised to strike. And they’ll be making offers beleaguered single- and small-chain hospitals can’t refuse, capice?

November 21, 2011

Hospital Strategic Partnerships Avoid Mergers, But Create Other Pain Points

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This is one of those periods in health biz history when M&A looks especially attractive.  What CEO wouldn’t give a second thought to getting acquired and picking up a bundle of cash when they’re struggling to survive?

In fact, one attorney with a national health care law firm argues that that as many as 50 to 60 percent of doctors and hospitals are looking for partnership opportunities of late, in part because health reform encourages consolidation.

The question is whether the institutions can put aside their differences long enough to talk business — particularly if they have dueling missions (such as religious charity vs. profit). Not only that, it’s not clear whether partnerships will meet their needs for long, as we’ll discuss below.

Given their druthers, many institutions would prefer to stick it out on their own and do things their own way. And despite the urge to merge, many hospitals are keeping their independence through strategic partnerships, notes Becker’s Hospital Review.

It’s hard to argue that partnerships can have their advantages, as the Becker’s piece notes. Hospitals can cut overhead costs by sharing services and staffing, while expanding on their local reach and adding services they might lack.

Partners can also come together to shore up specific service lines without having to invest heavily on their own. That was the purpose of a recent agreement between Saint Vincent Health Center in Erie, PA and the Cleveland Clinic, which are teaming to further boost the reputation of their already high-profile organizations in cardiac and neurological services, according to the Becker’s piece.

And hospital partners can save big bucks by rolling out the all-but-mandatory EMR system together, too.  Not only do the hospitals save bucks on staffing and technical expenses, they also end up sharing clinical data by default. Ideally, they’ll provide higher-quality care and save money by avoiding duplicate services.

Hospital partnerships may make it easier to build an effective Accountable Care Organization, too. After all, it’s easier to share data and coordinate treatment if you already have a trusting relationship in place, particularly if you’re already integrated clinically.

That being said, partnership building comes with its own set of frustrations. Take last year’s relationship struck by Reston, WA-based Providence Health & Services and Seattle-based Swedish Health Services.

To get along, the two parties had to set up a complicated structure letting Providence’s 27 hospitals keep their Catholic mission, while the five Swedish hospitals stayed non-religious. The two will work together using the Epic EMR to work together on shared best practices and population health.

And that’s far from their biggest headache. Ultimately, hospitals won’t save the kind of money they’d like to save, nor build new business the way they’d hope to, without completing a real merger. At that point, things can get expensive and even more complicated, as individual IDNs or facilities fight to keep key partners of their strategy in place.

Meanwhile, the hospitals in question may find that merging doesn’t meet regulatory approval. Hey, look at what happened when ProMedica Health System of Toledo and nearby St. Luke’s Hospital decided to get hitched. The $1.7B ProMedica chain, has 11 hospitals in Ohio and Michigan, came riding to the financially-ailing St. Luke’s rescue with a $35 million investment in August 2010.

Since then, though, the FTC has cracked down hard on ProMedica, arguing that the deal unfairly monopolizes the Toledo market,  in particularly by raising its share of the inpatient obstetrical services market to 80 percent. (Hey, ask your friendly editor and I have to admit that the FTC’s argument has some merit.)

So, where can hospitals turn if they want to thread their way through the current hospital business climate?

Well, at least one model — promoted by organizations like Paradigm Physician Partners and the LHP Hospital Group – have rolled out a model in which, as privately held companies, they form joint ventures with and sink capital into non-profit hospitals and health systems. LHP, which holds joint interest in some or all of the hospital’s operations through an LLC,  recently closed a deal with Pocatello, ID-based Portneuf Medical Center.

I predict that hospitals will find new ways to take in investment without giving up equity or their non-profit status. If new models pop up on my viewscreen I’ll let you know — I think this’ll be a hot new transaction strategy.

 

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November 7, 2011

Hospital M&A Getting Tough (But Misguided) Scrutiny From Lawmakers

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As us in “the biz” know, the pace of hospital M&A isn’t going to slow down anytime soon. Hospitals are huddling together to scale up for countless reasons.

The reasons for hospital consolidation are just about unstoppable, of course, as they include  a) well-founded fears regarding reform, b) trouble carrying the capital capital costs involved in scaling up health IT infrastructure, c) long-term trends squeezing hospital margins and d) the need to participate effectively  in ACOs, HIEs and other alphabet soup organizations.

Unless the government takes over the entire healthcare system and spends these factors away, they’ll push execs into the arms of their peers regardless of what federal policies roll out.  Yes, the FTC can put mergers on hold, and notably, has gone medieval on a few mergers just to prove it can, but let’s not pretend it has the resources to slow hospital consolidation dealflow much either.

So, I must say I was sort of amused to learn that members of the  House Ways and Means Subcommittee on Health took a  stern look at hospital dealmaking and consolidation last month.  You know, to me it’s like standing in a flooded basement in a rainstorm and focusing on a few cracks in the wall — but I digress.

At the hearing, an economics and health policy professor named Martin Gaynor testified that consolidation was picking up speed. He also asserted that studies show hospital prices going up meaningfully whenever hospital markets consolidate.

Geez, Professor Gaynor, you say that like it’s a bad thing! Doesn’t classical economics allow for the supply side folks to work together too, without breaking the system? Whoops, I digress again.

The hearing, which took place in September, also included data from a Rand Corp. study noting that health plans were consolidating dramatically, and that these mergers were giving health plans too much power.  (Wow, imagine that — health plans having too much power?)

Oh, Lord, why does all of this seem beside the point?  Well, probably because it’s not going to help anyone.  Sure, knowing  what impact hospital M&A is having is part of a well-informed Health Subcommittee’s job description.  And I appreciate that the Subcommittee is trying to look at the bigger picture, one which includes both health insurers and hospitals.

But hearings like this, which assume that pricing indicators are the best way to decide whether the public good is being served, strike me as painfully uninformed. While I’m no economist, I have seen a few deals come and go, and some ill-considered attempts to control dealflow too. After following the health market for decades, I’m convinced that playing Whack-A-Mole and slapping down those “bad guys” who are overcharging/underpaying gets us nowhere.

 

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August 31, 2011

Adding mini-hospital resolves clash between religious, secular facilities

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As secular, for-profit hospital chains merge with rule-bound religious facilities, patients are facing restrictions on their care that they hadn’t faced before. While for-profit hospitals will perform virtually any legal medical procedure, hospitals owned by religious institutions often impose faith-based limits on the treatments they will offer, with some refusing to provide services like emergency contraception for rape victims, vasectomies or tubal ligations.

However, one Louisville, KY based hospital may have found a compromise that could sidestep the issues entirely. The University of Louisville, which is poised to merge with Catholic-owned St. Mary’s Healthcare, plans to build what it calls a “hospital within a hospital” within St. Mary’s. The mini-hospital, which should cost about $15 million, will provide services that St. Mary’s will not.

U of L officials admit that building the special unit won’t be easy. For one thing, the university will have to get a separate hospital operating license for the unit, and hire a new group of employees.  Not only that, the tension between what the mini-hospital is doing and what St. Mary’s will permit will inevitably be something of a distraction.

Some critics, including state Attorney General Jack Conway, argue that the merger may not be such a good idea if U of L has to spend $15 million just to make it happen. After all, they note, the same $15 million could be used to pay for the care of the poor and uninsured.

As I see it, though, these objections are mostly posturing. The reality is that conflicts like this will crop up across the U.S., as there’s no end in sight to the country’s massive wave of hospital mergers.

I’m glad to see that U of L might have found a way of resolving its differences with St. Mary’s without the two sides coming to blows. Sure, it may be a bit messy, but if it allows the hospitals to pool their resources effectively, I hope other hospital dealmakers will consider this approach.  Building the hospital-within-a-hospital is certainly better then letting the issue fester.

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August 29, 2011

FTC: This Merger Looks So Good, It Has To Be Illegal

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If you’re as cynical as I am, it’s not hard to take a certain amusement in the goings-on in Toledo over the merger between an aggressive for-profit hospital chain and a suburban not-for-profit.

Over the past few months, the Federal Trade Commission seems to have developed a passionate interest in the merger between a formerly Lutheran-owned non-profit, St. Luke’s Hospital of Maumee, OH and ProMedica Health System of Toledo. ProMedica, which owns 11 hospitals in Ohio and Michigan — including four in the Toledo metro — is a swaggering giant with $1.7 billion in annual revenue.

What a sweet deal it was for ProMedica. According to Moody’s, the facility had very little debt ($8.3 million) and 412 percent cash-to-debt coverage as of November 30, 2009 (recently enough to matter).

Sure, as of early 2010 St. Luke’s had an operating cash flow deficiency of -2.0 percent and -9.8 percent operating margin, and at least according to Moody’s, had cut some cut-rate contracts with payors accounting for 22 percent of its operating revenues.

On the other hand, its miserably weak competitive market position which, as Moody’s noted in its downgrade report, included clashes with ProMedica, went away with the stroke of a pen when the two consummated their agreement. ProMedica sweeps in with its Aa3-rated borrowing capacity, invests a relatively slim $35 million and picks up the 10 percent market share SLH held at the time. I don’t know what 10 percent of the market is worth, but that has to be a fire sale.

Dig this if you can, cats and kittens:  According to the FTC,  the deal increases ProMedica’s market share in Toledo to 58 percent of inpatient services and (get this) 80 percent of high-margin inpatient OB services. Wow… Small wonder the FTC smells a rat.

Of course, in the sort of excess of confidence you always see in these deals, ProMedica’s executives are pretending the deal was good for the public and stuff.  I don’t know about you, but I find the following comment (made by ProMedica CEO Randy Oostra to the New York Times) to be preposterous:

“We could coordinate care,” Mr. Oostra said. “We could improve quality at St. Luke’s by adopting electronic health records and using clinical protocols to standardize the delivery of care. But the F.T.C. has stopped us in our tracks.” 

OK, let me get this straight, Mr. Oostra. You could only connect with St. Luke’s by buying it and forcing your EHR down its throat (after all, we know you’re not going to put St. Luke’s on Cerner if you use Epic)? You’re buying a hospital with tremendous upside largely because you think you can standardize care — because that will, of course, increase effectiveness and lower prices?  Oh, and as far as sharing data and coordinating care: have you ever heard of a health information network? Or an Accountable Care Organization?

Really, sir, if you want to impress the FTC with the public benefits of your transaction, you’re going to have to try a little harder. If you’re already phoning it in, to the Times no less, you’re not just arrogant, you’re stupid.

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April 30, 2011

Hospital merger mania on the rise across the U.S.

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As I reported a few days ago, hospital mergers and acquisitions hit a historic high last year.  This is shaping up to be a pretty frenzied year for hospital M&A as well.  In fact, this may be the year that hospitals see a historic change in how they’re managed and they define themselves.

How much merger activity will we see?  At the HIMSS11 event earlier this year, John Reiboldt of Coker Capital Advisers suggested that the single stand-alone hospital may be a “concept of the past.”

While the comment by Reiboldt may have been a bit tongue-in-cheek, it’s clear that many smaller hospitals and health systems are giving up long-held independence in an effort to survive.

What’s more, such deals seem to be getting a friendlier reception from the Department of Justice and the FTC, which revised its Horizontal Merger Guidelines in August of last year.

A few randomly chosen examples of regional mergers underway:

* The merger between Albany-based  St. Peter’s Health Care Services, Northeast Health and Seton Health/St. Mary’s Hospital is should close shortly.  After three years of talks, the three entities have gotten the FTC’s blessing to move ahead.

*Alongside of its massive effort to acquire Tenet, Community Health Systems has signed a definitive agreement to acquire Mercy Health Partners, a three-hospital system based in northern Pennsylvania.

* Peoria, IL-based OSF Healthcare may absorb Rockford (IL)  Healthcare System, despite some degree of public hostility to the proposal (and complaints from rival SwedishAmerican Health System.

I see no reason why this consolidation should slow down this year, particularly as reform deadlines grow closer. And I fully anticipate that hospital mergers will create a ripple effect that tips other industries into new formers of cooperation.  Fasten your seat belts — this year is proving to be a wild ride.

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April 27, 2011

Big hospital chains have outlived their usefulness

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Regardless of what Community Health Systems execs may think, big, massive, overstuffed hospital mergers aren’t going to work in the next decade.  No amount of economies of scale will make up for the dollars health systems will lose if they decide to operate their business if it were Walmart.

Look at the history of the market.   Massive scaling up of hospital infrastructure — remember the grand Medicare-fueled building party in the 1960s? — has always been followed by financial weakness, overbedded markets and vicious regional competitions nobody can win.  Hospitals that try to reproduce this technique in multiple markets are only going to do worse.

In truth, I imagine CHS and other large hospital players are more focused on generating leverage with payers.  (They mostly have to scream “economies of scale” to satisfy Wall Street investors who wouldn’t know an ICU from an inside pitch.) After all, as reform washes over the land, the big health plans are going to see big upward jolts in their covered base.   And since the newly-insured aren’t likely to be cash cows, health plans are going to be more cost-conscious than ever when they negotiate.

“Massive scaling up of hospital infrastructure — remember the grand Medicare-fueled building party in the late 1960s? — has always been followed by financial weakness, overbedded markets and vicious regional competitions nobody can win.”

That being said, I don’t think creating hospital megaliths will tilt the scales back into balance.  Hospitals will always be on defensive when it comes to health plan contracts;  the brutal fact is that health plans have the money, and hospitals don’t. Hey, you can scream, we’re the best in the region, but let’s face it folks, health plans are more in the quantity than quality game.

So, what do hospitals do to cope with their vulnerability?  Careful, gradual acquisitions in key markets, strategically positioned to streamline the way they run key service lines across a region.  And integration, Lord yes,  but I’d argue creating your own health plan is a much better bet than buying medical practices willy-nilly.  (OK, you can do both, but I’d argue that putting a health plan in place should be the priority.)

By the way, I’d argue that the growth of the ACo concept suggests that I’m not alone — that just about every policymaker thinks that managed care-style medicine needs to be nurtured by providers.

Under these circumstances, big hospital mergers look even worse, as it’s pretty hard to build tight collaborative relationships when all orders have to come from the mothership in Nashville or Dubuque.

No, I say, a time comes for all industries when it’s time to think small, and this is it.  Tenet, HCA, Community Health, the big Catholic systems — now is the time to decentralize aggressively or pay the price. You’ve got three and a half years before reform goes full tilt. Tick tock, folks.

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April 19, 2011

Tenet/Community Health battle brings host of troubles

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My oh my.  Don’t we have a pretty enough dustup going on here without the need for more schaudenfreude? Apparently not.

As most of you know, Community Health Systems (CYH) made a $3.3 billion hostile takeover bid for Tenet Healthcare Corp (THC) late last year.

Since then, things have gotten rather ugly, with Tenet suing CHS this month over allegations that its suitor was, shall we say, not playing by the rules of the game.

More specifically, it accused CHS of gaming Medicare by admitting patients who weren’t sick enough to merit a costly inpatient stay.  Tenet argued that by building such system-gaming into its offer, CHS was over-valuing the stock it was using to pay for the takeover and overstating the savings it could accomplish.

Since then, CHS converted its takeover big from part-stock, part-cash to all cash. And today, April 20, CHS moved to have the Tenet suit dismissed, contending that with the stock out of the picture, Tenet had no basis to whinge about the deal. (For brownie points, here’s CHS’s press release on the request for dismissal.)

Still, even if Tenet’s Trevor Fetter and CHS’s Wayne Smith let bygones be bygones and throw a joint Passover Seder — complete with charoset! —  the host of troubles springing from this deal is pretty ong:

*  CHS has gotten a subpoena from the HHS OIG over possible Medicare and Medicaid billing fraud, matters which, one imagines, might not have come to the feds’ attention for quite some time if CHS execs had held their fire. (Look how far Columbia/HCA was able to go, and for how long, before the s–t hit the fan. Just ask our friend Rick Scott — oops, I mean Governor Scott.)

* Law firms like this one are sniffing the entrails to see if they can gin up a shareholder suit out of this somehow. And why not? Hey, shareholder suits are to the moneyed class what slip-and-falls are for the down-and-out — they file for the money, but being righteously justified is a nice payoff too.

* Suits and counter suits, federal subpoenas and shareholder angst aren’t good medicine for either players’ stock, which has been skidding in the wake of all of these skirmishes.

Hey, what ever happened to good old-fashioned tear-their-throat-out competition within markets?  Seems to me the play these days is to tighten up local health system networks rather than try for an outmoded “economies of scale” merger, anyway. But that’s just me. You?

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December 14, 2010

The great sucking sound: For-profit buyouts a drain on communities

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Few have spent more time than I calling out non-profit hospitals on their inadequate charity care levels.  But when it comes down to

This picture shows a panorama of Boston (USA).

Boston, there's a new predator in town

it, I’d prefer a non-profit whose chain can be yanked over a for-profit with no public service requirements at all.

I was reminded of my concerns this week when I heard about the two hospitals Cerberus Capital Management agreed to acquire this week.  It’s picking the hospitals up from Essent Healthcare, another for-profit.  Cerberus, a New York-based private equity firm, just spent $900 million for the six-hospital non-profit chain Caritas Christi. That gave them a nice foothold in Boston, an incredibly competitive but opportunity-rich environment.

Really, both of deals the two-headed guardian of the afterlife has chosen seem to be good ones — for them.  While I’m not privy to much financial information on any of the eight hospitals, we do know that Caritas Christi was in big trouble financially.

I’d wager that the other two hospitals, which lie in the Boston suburbs, are in bad need of a capital infusion to prop them up during these bad times.  This situation allows the firm to swoop in, buy equipment, get things shipshape and get their money many times over.  Oh, and probably do a nice job of squeezing the health plans, now that they’re getting critical mass. Again, good for them.

The thing is, I strongly doubt that any private equity firm is going to have the interests of the community in mind.  One way or another, in most of the private equity buyouts I’ve followed, all of the extra money generated by improvements ends up in the bulging bank account of the PE guys.  They’re not in ANY investment for the long term; that’s just not what they do.  They’re there to pillage, however, legally, and get the hell out.

Far too often, PE players get into a deal, drag the hospitals down financially and then more or less shrug their shoulders when the facility plunges into the red.

The PE firm doesn’t give a rat’s patoot — they’ve made their money. The often-struggling community is left with, well, not a whole lot.

I’d argue that this is a travesty.  We need, as professionals and healthcare consumers, to keep hospitals as community asset with a strong bank account and a long-term view.

So, my question to you is this. Is it inevitable, during this period of transition to full-out reform, that community hospitals get decimated?

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