The Year of the Deal
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Two unusual acquisitions mark a period of transformation at nonprofit Novant Health.
Is the management team of Novant Health crazy, or crazy like a fox? That's the question many are trying to answer after a year that saw two major deals for the Winston-Salem, NC-based nonprofit healthcare company. If you're wondering what a nonprofit hospital operator is doing taking on nearly three-quarters of a billion dollars in liability to purchase a for-profit imaging center company and a 27% stake in several hospitals owned and managed by a rival for-profit hospital chain, you're not alone (see "Novant's Buying Binge").
In August 2007, Novant, an owner of seven hospitals, agreed to purchase MedQuest Inc., which owned 91 diagnostic imaging centers, many of which were in far-flung markets in which Novant had no presence, for $45 million and an assumption of $372.8 million of MedQuest's debt, according to Standard & Poor's. In the wake of recent cuts in imaging reimbursements by both Medicare and commercial insurers that theoretically make investing in imaging less attractive, the transaction was curious, to say the least.
Then in March, Novant paid $300 million to Health Management Associates Inc. for a 27% minority interest in seven hospitals in the Carolinas. This purchase was closer to Novant's preferred market, but many questioned the aggressive move. HMA will continue to manage the hospitals in the joint venture, but the true gem of the purchase might be 119 physicians and mid-level practitioners who came along with the hospitals—and whom Novant will employ going forward.
For a nonprofit hospital system that has made two substantial purchases in short succession, it helps to have clearly identifiable synergies to promote. In the case of Novant, which identifies the Carolinas and parts of Georgia, Virginia, and Tennessee as core markets, that's a problem. But if so, it's largely a problem of perception, says Novant chief financial officer Dean Swindle, who sat down with HealthLeaders senior finance editor Philip Betbeze for a conversation about the deals and whether they will help Novant better position itself for the future.
HealthLeaders: Were you surprised by the skepticism many voiced about these deals?
Dean Swindle: I was surprised there wasn't more. The rating agencies, for instance, were critical of the 1997 merger between [Winston-Salem's] Carolina Medicorp Inc. and [Charlotte's] Presbyterian Health Services Corp. that created Novant. It was an equal merger, but back in those days there were never any two-market hospital mergers. But it was by far the best strategic move we've ever made. It laid the foundation for us to go forward.
HL: How do these deals support your mission?
Swindle: Large systems are rightly doing more around the consumer. Here's why: Novant does 100,000 inpatient discharges a year but more than 4 million ambulatory encounters. So we aren't any different from a consumer business. We could have gone out and bought hospitals to grow into areas we want to enter. But we're moving more toward an ambulatory world.
HL: Why imaging when imaging seems oversupplied and under-reimbursed?
Swindle: The decline in reimbursements for imaging isn't that much of a concern. In fact, it's probably what got the private equity folks even interested in selling. They were so leveraged. We stumbled on MedQuest. They had 90 sites—about 65 of which are in the Southeast—in those four or five states that are certificate-of-need states. When we approached them and wanted to buy North and South Carolina, they weren't interested in selling off those centers only. The only way we could buy it was to take the whole company. We did our due diligence and found that as a 13-year-old company, their base had been built off CON states, giving us some protection, and their culture was built on customer service and patient convenience. Our physicians who have used them told us that.
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