Hospital Mergers Loom as U.S. Health Overhaul Fails Centers

http://www.fxfxfx.com 2010-02-02 16:32:23
Failure to pass the health-care overhaul may accelerate a push by Community Health Systems Inc., Health Management Associates Inc. and LifePoint Hospitals Inc. to acquire facilities weakened by the recession.

The nation’s largest publicly traded hospital chains are stalking medical centers that have been hurt by the cost of charity care and unpaid bills in a recession, and are no longer confident stalled health legislation will add 30 million newly insured customers, said Sheryl Skolnick, an analyst at CRT Capital Group LLC in Stamford, Connecticut.

A third of 5,010 community hospitals had operating losses in 2008, according to the American Hospital Association. Health Management, the second-largest publicly traded chain with 55 hospitals, is “seeing increased opportunities” to acquire centers for prices that have dropped as much as 50 percent in three years, said Senior Vice President Robert Farnham. LifePoint, with 47 facilities, may buy three more this year, said Chief Executive Officer William Carpenter.

“For the first time in four to five years the for-profit hospital chains are aggressively looking for significant opportunities,” said Patrick McMullan, managing director and co-head of health-care investment banking at Barclays Capital in New York, in a telephone interview. “All of the big health-care chains are looking.”

They may find an excess of willing partners “as individual hospitals come to terms with the death of the health reform effort,” CRT’s Skolnick said in a telephone interview.

52 Mergers

There were 52 hospital mergers in 2009, with a total value of $1.7 billion, according to Irving Levin Associates Inc., an investment research company in Norwalk, Connecticut. That was down from 60 deals in 2008 for $2.6 billion.

Most likely to be acquired in the coming year are nonprofit rural and urban hospitals in communities with fewer privately insured patients and more people who are covered by government health programs or who lack insurance, Skolnick said.

The acquisition “pipeline is active,” said Farnham, of Naples, Florida-based Health Management. Small hospitals “are going to find it difficult to borrow money and are really looking for strategic partners,” he said at a Jan. 26 Jefferies & Co. health-care conference.

Multihospital health systems have an advantage over individual centers in accessing capital to finance expansion, renovate outdated buildings and acquire new technology, said investment banker William Hanlon, the Atlanta-based managing director of Shattuck Hammond Partners LLC. They also have cash to make deals.

‘Struggling More Than Ever’

“Smaller and independent community hospitals are struggling more than ever” because of the weak economy, unemployment and losses from charity care, Health Management’s Farnham said at the Jefferies conference. “What has really changed over the past year is access to capital,” he said.

Franklin, Tennessee-based Community Health, the largest publicly traded chain with 122 hospitals, had $433 million in cash in Sept. 2009, according to a regulatory filing. Health Management had $222.3 million; Brentwood, Tennessee-based LifePoint had $120 million; and Dallas-based Tenet Healthcare Corp., the third-largest chain with 49 hospitals, had $731 million.

Community Health rose 16 cents to $32.78 in New York Stock Exchange composite trading yesterday. Health Management Associates increased 12 cents, or 1.8 percent, to $6.76, and Tenet fell 5 cents to $5.49, on the New York Stock Exchange. LifePoint jumped 25 cents to $30.23 in Nasdaq Stock Market composite trading.

$155 Billion in Cost Cuts

Hospitals agreed during last year’s negotiations with the White House to accept about $155 billion in cost cuts, largely from reduced government payments. In return, hospitals may have gained $171 billion over 10 years from reimbursements for newly insured patients under legislation proposed in House and Senate bills according to an estimate by the Chicago-based American Hospital Association.

That legislation is in jeopardy because Democrats lack the votes in the Senate to pass a health overhaul bill by themselves after they lost a seat in a special Senate election in Massachusetts on Jan. 19.

Alfred Knight, CEO of Scott & White Healthcare, a Temple, Texas-based hospital and physician group, said he sees Congress “backing off” from the idea “that there even is a problem” with health care.

‘Not Optimistic’

“I am not optimistic about a significant change happening in coverage for the uninsured,” Knight said in a telephone interview.

The seven-hospital Henry Ford Health System, based in Detroit, is “very concerned” about a scaled back health- overhaul effort, said CEO Nancy Schlichting in a telephone interview.

The jobless rate in Detroit hit 27 percent in October, pushing Henry Ford’s charity care, or unpaid medical services, to $180 million in 2009, up 12.5 percent from 2008. That figure may reach $200 million in 2010, Schlichting said.

In recent years the Henry Ford system, which employs 23,000, has expanded to the suburbs in search of more affluent patients. The system acquired two hospitals in Warren and Clinton Township, Michigan in 2007, and opened a new hospital in West Bloomfield, Michigan, in 2009.

LifePoint, which operates hospitals in 17 states, announced on Dec. 21 the appointment of executive Jone Koford to lead the company’s acquisition efforts as president of strategic growth and development.

‘Growing a Little Faster’

“We will be looking at a little bit larger facilities and in markets growing a little faster” than current hospitals, said Carpenter, LifePoint’s CEO.

Tenet is also looking, CEO Trevor Fetter said on an earnings conference call with analysts on Nov. 3.

Dallas-based Tenet “will look for opportunities that make sense with our portfolio and our footprint, and we would have some desire to diversify geographic risk,” Fetter said. The hospital chain may provide details of its plans when it announces fourth-quarter earnings on Feb. 23, Fetter said at the time.

Smaller hospital groups are also pushing to grow and, in a case involving St. Vincent’s Hospital in New York City, that has led to controversy over how best to serve the community.

Last week, Continuum Health Partners, a nonprofit that operates five New York hospitals, said it had proposed taking over St. Vincent’s. A Jan. 26 state health department report showed the hospital was losing $5 million to $10 million a month.

Protest Letter

Continuum said it would turn St. Vincent’s into an outpatient center, a suggestion that sparked a protest letter to the state health department. Scott M. Stringer, the Manhattan borough president, signed the letter, which labeled the proposal “unacceptable,” saying such a move would leave much of the borough’s West Side without a hospital.

On Jan. 30, St. Vincent’s hired Grant Thornton LLP to advise on the institution’s attempt to restructure and improve its finances. Continuum had said it had made its proposal at the request of St. Vincent’s.

“Across the board, everyone is open for business again” after a “hiatus when no capital was available,” Shattuck Hammond’s Hanlon said.

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