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Solving the Capital Dilemma

Philip Betbeze, for HealthLeaders Magazine, December 11, 2008
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Faced with outdated facilities and little or no money to upgrade, more hospitals are considering partnerships with for-profit organizations amid tight credit markets.

It's no secret that access to capital has long been a problem for standalone community hospitals. Their inability to obtain attractive terms to finance replacements for hospitals that are as much as 60 years old is a big reason many of these hospitals simply can't compete with nearby teaching hospitals or well-capitalized community hospitals that are part of a health system.

And that was before the credit crisis hit.

Gateway Medical Center in Clarksville, TN, was in that position a few years ago—operating from a former government facility (Clarksville is the nearest city to the U.S. Army's Fort Campbell) that was built in the 1950s.

"Our hospital was in dire need of capital, and we weren't able to make it happen," says Gateway Medical Center Board Chairman William H. Wyatt, a lifelong Clarksville resident and executive vice president with F&M Bank. "The board decided to sell the hospital outright with the restriction that whoever bought it would build a new hospital."

Dozens—perhaps hundreds—of community hospitals are facing similar challenges these days. The current economic crisis has only exacerbated the access-to-capital dilemma for these facilities. Typically, their choices are stark: Continue to operate with substandard facilities and slowly bleed away financially, sell outright to a for-profit hospital company, or close.

A fourth option
Triad Hospitals emerged as the unexpected winner in a request for proposal process to buy and build a new Gateway. The new facility, which almost doubled the footprint of the old building, opened for business last June with 270 beds in a 550,000-square foot, state-of-the-art facility. Triad won, says Wyatt, because it offered a fourth option—a nonprofit/for-profit partnership idea born at HCA before it spun off Triad.

Typically, such deals are structured so that the for-profit company buys 80% of the hospital from the local nonprofit board, which then funnels the money into a nonprofit foundation to help the area's healthcare needs. The acquiring company also agrees to provide capital for a new hospital and build it. What makes it palatable for the nonprofit board is that although the new corporate partner gains an 80% equity stake, it only controls 50% of the new entity's board seats, and thus 50% of its governance.

"It appealed to us because it let us keep a finger in the pie with 20% of the new JV and 50% of the governance," says Wyatt. "It was really the best thing we could've done for our community."

The only problem for hospitals interested in trying this model is that Triad was pretty much the only for-profit hospital company that was interested in doing them. And Triad's gone now—bought by Brentwood, TN-based Community Health Systems, which prefers to own its hospitals outright.

But not forgotten
According to former chairman and CEO James D. Shelton, Triad's problem was the fact that it was a publicly traded hospital company, and its business model did not jibe with Wall Street's focus on quick profits. When the partnership model didn't show immediate results, the share price tanked and dissident shareholders gained enough influence to determine the direction of the company and forced a sale to Community for $5.1 billion and the assumption of $1.7 billion of Triad's debt.

Faced with outdated facilities and little or no money to upgrade, more hospitals are considering partnerships with for-profit organizations amid tight credit markets.

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