Business Roundup: Tenet's Vanguard Buyout Raises Bar for Independent Hospitals

Tenet Healthcare's deal to acquire Vanguard Health strengthens Tenet's ability to make acquisitions of not-for-profit hospitals and "might prompt smaller, stand-alone hospitals to consider some sort of alignment," Moody's Investors Service says.

Tenet Healthcare Corp.'s $4.3 billion acquisition of Vanguard Health Systems, Inc. is a credit negative for not-for-profit hospitals, particularly for smaller, stand-alone hospitals that will have to compete within the service areas of the soon-to-be much larger for-profit company, Moody's Investors Service says.

"The reality is this just puts a very effective competitor in their back yard or their front yard, potentially," says Beth Wexler, vice president and senior credit officer at Moody's. "Bigger picture, these smaller hospitals that might have significant capital needs don't necessarily have great leverage with payers or alignment with physicians, particularly when you are talking about markets that are more secluded or rural or difficult to recruit to. They are going to be more and more challenged to have an operating platform that is sustainable."

A Moody's analysis notes that the planned acquisition "consolidates two large and powerful systems into a bigger company with pro forma revenues of $15 billion as of 31 March that will increase competition, particularly for smaller standalone NFP community hospitals that operate in the Tenet and Vanguard markets."

When the merger is finalized, Tenet will operate 77 hospitals in 30 markets, which includes Tenet's 49 hospitals in 24 markets and Vanguard's 28 hospitals in six markets.

Moody's says that "the potential shared savings and combined resources will allow Tenet to engage in new and enhanced competitive endeavors that could threaten NFP hospitals, especially those with fewer resources. In recent years, Tenet has diversified its business with financial consulting services to hospitals and other healthcare-related businesses. Both Tenet and Vanguard have aggressively expanded their outpatient presence and often compete with similar ambulatory strategies as NFP hospitals."

Moody's also notes that the merger "strengthens Tenet's ability to make acquisitions of NFP hospitals. Such acquisitions are typically credit positive for target hospitals, particularly distressed institutions, as the acquisition typically results in 100% redemption of the target's outstanding bonds."

Wexler says the Tenet/Vanguard merger might prompt smaller, stand-alone hospitals to consider some sort of alignment, "whether it is clinical alignment or strategic alignment around certain services, or just looking for the protection of a deeper pocket."

"Each market is different and will somewhat dictate what is needed but it is more and more challenging," she says. "Reimbursements are declining. Volumes are declining. To the extent that these are not really high-acuity hospitals to begin with they are going to be more challenged to keep the volumes, the heads on the beds, which is not the game anymore. Having an effective competitor in the market with deeper pockets and a greater expanse, taking that leveraging power of the two for-profit companies and having them come together, just makes these for-profits more effective competitors in these marketplaces where these independents are already feeling pressures and challenges."  

HMA Fixes July 18 as Record Date for Shareholders in Glenview Vote
Health Management Associates, Inc. has fixed July 18 as the record date for Glenview Capital Management's consent solicitation, which gives shareholders of record on that date the chance to choose whether to replace sitting HMA directors with the nine nominees put forward by Glenview.

Glenview, which owns 14.6% of HMA common stock, issued a notice to shareholders that any shares on loan on July 18 will not be eligible to consent.

Glenview, HMA's largest shareholder, filed documents with the Securities and Exchange Commission calling for the replacement of its board of directors.

In the SEC filing, Glenview says, "…[W]e are setting forth a path that we believe creates the strongest future for HMA's patients, employees, and investors while minimizing the risk to each vital constituency. We suggest HMA shareholders consent to fully reconstitute the Board…"

Glenview recommended replacing the board with "highly qualified, independent, newly elected directors" which it dubbed the "Fresh Alternative."

Headquartered in Naples, FL, HMA operates 71 healthcare organizations in 15 states. The fight for control of the company comes as Reuters reports that rivals of HMA, including Community Health Systems, are discussing a potential deal to buy the $4 billion hospital operator.

Carolinas HealthCare System to Buy Stanly Health Services

The board of directors at Stanly Health Services has agreed to sell the Albemarle, NC-based health system to Carolinas HealthCare System after negotiating a deal that includes $70 million in upgrades and other investments over the next 12 years, the two systems announced.

If the deal is approved by state regulators and the Carolinas HealthCare board, the existing management services agreement between the two health systems that has been in effect since 2009 will be cancelled and the transfer of ownership will become effective Oct. 1.

Financial terms of the deal were not disclosed, but Carolinas said it will spend $70 million over 12 years to improve patient care services and facilities within Stanly. Targeted investments include an upgrade of the information technology systems, expanding the intensivist program at the 119-bed Stanly Regional Medical Center, expanding the emergency department from 18 to 28 beds, patient room improvements, and building an urgent care center in Albemarle.

"As board members, our top priority is to ensure the long-term sustainability of our organization so we can continue to provide healthcare services of the highest quality well into the future," Stanly board chairman Larry Baucom said in prepared remarks.  

"Extensive due diligence and evaluation went into this decision and the board believes that formally becoming a part of Carolinas HealthCare System is in the best interests of our patients, our employees, our physicians and our community. In this time of tumultuous change in healthcare we are now aligning our two systems to meet future challenges and opportunities."

Carolinas HealthCare System will assess medical staff needs and recruit physicians to Stanly County. Two members of the Stanly Health Services Board of Directors will be appointed to a new SHS board, and the remainder will be appointed by Carolinas HealthCare System to a newly created advisory council.

St. Joseph's to Align with CHE Trinity Health

St. Joseph's Hospital Health Center will join CHE Trinity Health – the nation's second-largest Catholic healthcare system -- following the signing of a non-binding Letter of Intent by their boards, the two organizations announced.

Financial terms were not disclosed.

If the deal is finalized, it would change ownership of Syracuse, NY-based St. Joseph's from the Sisters of St. Francis of the Neumann Communities to Catholic Health Ministries, the entity that sponsors CHE Trinity Health. CHE Trinity Health was formed in May 2013 when Catholic Health East and Trinity Health merged operations in 21 states.

"When CHE and Trinity Health consolidated, we saw a new organization of which we wanted to be a part because of the promise its new ministry offers," St. Joseph's CEO/President Kathryn Ruscitto said in prepared remarks. Ruscitto said the sale will give St. Joseph's to access the resources and economies of scale provided by a large health system while retaining some sense of autonomy.  

"Most importantly, St. Joseph's will retain its governance structure and continue to operate locally, while gaining additional support from the breadth of CHE Trinity Health's combined strength, educational opportunities and best practices," Ruscitto said.

Sister Roberta Smith, general minister of the Sisters of St. Francis, said "the Sisters of St. Francis fully support St. Joseph's decision to align with CHE Trinity Health. We strongly believe CHE Trinity Health will provide a strong vision, bound by faith, for the future of St. Joseph's and the benefit of the Central New York community. We remain committed to the mission of St. Joseph's and will continue to lend our spiritual support for the compassionate good works of the institution."

The two systems said they will work together during a due diligence period over the next several months before finalizing the sale.

St. Joseph's Hospital Health Center includes a 431-bed hospital and healthcare system that provides services to patients in 16 counties in Central New York State. CHE Trinity Health is in 21 states across the nation with 82 hospitals, 89 continuing care facilities and home health and hospice programs that provide nearly 2.8 million visits annually. It employs more than 87,000 people, including 4,100 employed physicians.