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For-Profit Buyers Drive Recent Spate Of Health-Care Deals

DBR Small Cap

For-Profit Buyers Drive Recent Spate Of Health-Care Deals

By Jacqueline Palank

For-profit health-care companies are increasingly snapping up their struggling not-for-profit brethren, a trend restructuring experts say will continue as years of financial woes drive the industry’s consolidation.

These investor-owned companies have long seized opportunities to grow by buying up nonprofits, many of which lack the capital and resources to stay afloat. But the action has picked up amid an economic downturn that’s compounding the many financial pressures that nonprofit facilities are already facing.

“As prices have gotten attractive, and the investor-owned systems have gotten reasonably flush with cash…there are more transactions that are happening,” said bankruptcy attorney Robert Guy Jr. of Frost Brown Todd.

Just last week, Ohio nonprofit Forum Health won bankruptcy-court approval to sell its three-hospital system to publicly traded hospital operator Community Health Systems Inc. for $120 million. Last month, publicly traded LifePoint Hospitals Inc. won court approval of its $154 million offer to take Tennessee nonprofit Sumner Regional Health Systems Inc. and its four hospitals out of Chapter 11 protection. And Detroit Medical Center is aiming to cure its financial ills via a pending sale of its eight-hospital system to privately held Vanguard Health Systems, a deal that’s worth more than $1 billion.

Health-care companies aren’t the only buyers: private-equity firms have gotten in on the action, too. In March, Cerberus Capital Management said it struck an $830 million deal to acquire New England’s second-biggest hospital chain, Caritas Christi Health Care. Driving these deals is the difficult financial situation non-profits now find themselves in, unable to raise the capital needed to survive, let alone stay competitive.

“Unfortunately, the nonprofit model is not one that in the last decade has had significant access to capital,” said James Tancredi, a partner in Day Pitney’s bankruptcy practice. “They’ve been cannibalizing themselves in part and building a bubble of problems. Aside from having obsolete facilities and/or obsolete technologies, they have off-sheet balance sheet liabilities that have come to limit them.” As a result, the restructuring options that a nonprofit hospital might pursue are no longer on the table.

“It’s very difficult now for them to become extremely efficient. They don’t have the capital to do a significant expansion, and there may not be another system that they can join in with as sort of an alliance,” said Guy, who led Sumner Regional through its bankruptcy. “In a lot of cases, the best option may be to sell.”

A few nonprofits were able to partner with or acquire other struggling institutions. But according to Daniel McMurray, managing director at turnaround firm Focus Management Group, that’s the exception rather than the rule.

“Some of them have been able to find nonprofit partners or acquirers. But in many cases, the nonprofits don’t have the capital themselves to apply,” McMurray said. “The for-profits are in a better position, with greater liquidity, and can make that investment and take that risk.” Nor can public hospitals count anymore on local and state governments to cover critical funding gaps.

“As governmental entities feel more fiscal pressure, you’re going to see less support to prop up the less viable entities,” said Anthony Pacchia, chief executive and founder of advisory firm Traxi.

A for-profit’s bid to acquire a nonprofit can be difficult to win support for, as communities fear the loss of jobs as well as the fate of a longstanding institution and its charitable mission. But states, whose regulators must often sign off on these deals, now recognize that they can no longer do enough to solve the many problems some of these facilities now face. “The community wants to maintain a level of service, as do the governmental agencies, but there’s got to be a balance between that want and the need to maintain a facility,” said Traxi managing director Steven San Filippo.

Nevertheless, challenges do arise when buyer and seller try to reconcile their two very different missions. “There’ll definitely be some conflict,” said Gary Marsh, a partner with McKenna Long & Aldridge. “For the nonprofit, generally the mission is to serve whoever whether they can pay or not pay – and a for-profit is going to get more paying patients and focus on those services that generate more dollars or higher reimbursement rates.”

To grease the wheels, a for-profit buyer might make pledges to continue fulfilling some components of the nonprofit’s mission. Cerberus, for example, isn’t only pledging to pump $400 million of new capital into Caritas and to assume about $430 million of the Catholic health system’s liabilities. It’s also agreed to run the hospital in accordance with the teachings of the system’s founders. While there may be a lot of hoops for for-profit buyers to jump through, the complications are outweighed by the chance to solidify their spots in and undustry whose services will always be in demand.

“While in much of our economy right now you can’t predict growth of revenue because you can’t put your finger on things like consumer spending, health care – like the provision of food – is a fundamental need that is embedded in communities,” Tancredi said. While the for-profits have the resources to resuscitate the ailing nonprofits they purchase, the jury’s still out as to how successful the new facilities will be.

“They have raised public money and captured more and more market share and ostensibly more and more revenue sources. They attract more money because they appear to be growing,” Tancredi said. “Time will tell whether they properly integrate these acquisitions and rationalize them as they believe they can.”

Steve San Filippo, a managing director at Traxi LLC, specializes in generating value enhancing, innovative solutions in corporate finance, restructuring, transaction support and asset recovery situations. He can be reached by e-mail at ssanfilippo@traxi.com.