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Community Health Systems Chief Talks HMA Merger

 |  By Margaret@example.com  
   August 01, 2013

On an earnings call, the chief executive officer of CHS offers details on the forthcoming merger with Health Management Associates. Described as a "revenue opportunity," the deal will form the largest for-profit hospital system in the U.S.

Wayne T. Smith, the chair, CEO and president of Community Health Systems, told analysts during its second-quarter earnings call Tuesday that the merger with Health Management Associates is a "unique and transformative strategic opportunity" that will position the combined company to take advantage of opportunities presented by healthcare reform.

"Our strategy for healthcare reform has been straightforward: demonstrate quality in our market, enhance productivity and manage resources, deliver infrastructure necessary to implement HI-TECH and [healthcare] reform, and participation in managed care networks. We anticipate about 14 million newly insured patients in 2014, and the combination of CHS and HMA will make us stronger and better prepared for reform."

The merger, which is expected to be completed during the first quarter of 2014, will create a 206-hospital system—the largest for-profit hospital system in the U.S. It will have 31,000 beds and operate 1,000 clinics across 29 states. On a combined basis, 63% of the hospitals are sole providers in their respective markets. The system will have more than $18 billion in annual revenue.

In his presentation and during the question-and-answer period with analysts, Smith described the financial arrangements of the merger and made the case for the HMA deal. Here are the highlights:

Why merge? Smith described the merger with HMA as a "revenue opportunity" in terms of working with physicians and building networks to enhance revenue. "This is opportunistic. This industry is having a very difficult time, if you haven't noticed, in terms of all of our earnings. This is an opportunity for us to scale, get synergies, [and] improve our geographic presence."

Purchase price. It is a $7.6 billion deal, which includes an estimated $3.9 billion in cash and stock for HMA's equity and the assumption of $3.7 billion in HMA's outstanding debt. Smith said both CHS and HMA are happy with the cash-stock combination. "We thought that was a good way because we couldn't get the value any higher than we thought it currently is. We thought it would be a good way for people to participate in the future."

Markets. Smith described the "complimentary geographic fit." CHS and HMA will serve 29 states with an overlap in 15. Although both systems have a rural flavor, their hospitals are "largely in different markets" which means the CHS brand will expand to new communities.

Cutting costs. Smith said there is about $100 million in overhead reduction to be made, including supply management. Expect CHS to eliminate some of HMA's outsourcing. Smith mentioned that CHS has an internal collection agency that brought in $250 million in 2012 at an effective rate of about half of external vendor rates. Its eligibility screening service is also internal and does the job for about one-third of outsourcing costs, according to Smith.

IT expenditures. HMA's IT system will need some investment. Smith said that the development side of HMA's IT "has very good potential" while the operating system "needs work." CHS has "factored in some extra costs that are likely to be spent over the couple of years."

Possible divestitures. When asked about anticipated divestitures from the deal or to comment on markets where there might be concerns about market share, Smith declined to comment extensively saying simply that it was "too early to talk about that."

Margaret Dick Tocknell is a reporter/editor with HealthLeaders Media.
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