Nonprofits Weigh Benefits of Buyer Joint Ventures

The growing number of joint ventures and mergers between non-profit and for-profit hospitals may signal a warming trend in longstanding frigid relations as the rival sectors come to recognize the merits of working together in an evolving healthcare environment.

At least, that's the opinion of James E. Burgdorfer, a principal at Juniper Advisory LLC,the privately held, Chicago-based investment banking firm that provides merger and acquisition advice for nonprofit hospitals.

"A significant and growing minority of hospital leaders are taking the view that it might be inevitable that nonprofit status for hospitals could at some point in the future go away," Burgdorfer says.

"There are two reasons for that. One is that there are more attacks being made by counties and cities and states against tax exemption around the country. As more cities and counties are in desperate need of money they are going to go after nonprofits more and more."

"And number 2, there is a general feeling that with the passage of the [Patient Protection and] Affordable Care Act and the Supreme Court's ruling upholding it that down the road sometime there isn't going to be much charity care because everybody is going to have insurance. The thought is starting to register that maybe the charitable care exemption is going to go away."

In a new era of tighter regulation and smaller margins, Burgdorfer says the operational differences between for-profit and nonprofit hospitals also "has narrowed dramatically."

"Nonprofit hospital companies are definitely operating more like a for-profit company and for-profit companies over the last 20 years have been trying hard to improve quality and the relationships with the communities they serve," he says. "A lot of experts today would argue—and there is a lot of truth in their argument—that there isn't a lot of difference between the two."

"However the fundamental differences remain intact. They have different sources of capital that are backing them. And there is an inherent need to work together and to have access to both debt capital, which has historically backed the nonprofit sector and equity capital which has historically been a large source of capital for the for-profit hospitals. It is wise for them to see the inherent strength in coming together for these joint ventures."

A sign of this warming trend, Burgdorfer says, is the growing popularity of the buyer joint venture, in which the nonprofit hospital sells a majority ownership to a for-profit partner, while still retaining a minority interest that includes an active role in hospital governance.

BJVs allow non-profit and for-profit hospitals to combine and tap their traditional strengths. For non-profit hospitals that means maintaining clinical services, community relations, and an institutional reputation. The for-profit partners offer access to capital and business management. While the BJV means that the new health system changes to a for-profit entity, the partnership continues to operate under nonprofit principles that include access to charity care.

A prime example of a BJV would be the partnership that was finalized in September when Duke LifePoint Healthcare acquired Marquette General Health System, a regional referral system that serves a 15-county region in Michigan's Upper Peninsula.

"Conceptually it's very simple," Burgdorfer says. "It's a way for for-profit hospital companies and non-for-profit companies who have historically been at odds with each other to work together and own hospitals together either buying building them buying them or jointly throwing a bunch of hospitals that they own independently into a commonly owned group."

"My own personal view is that buyer joint ventures could be a harbinger of that change in that for-profit companies and 501(c)3s really are the agents of change in the hospital industry. As they begin to work together maybe that is the beginning of the end of the difference between for-profit and not-for-profit. But that is 20 years away."

Burgdorfer says keying on the technical and legal details of BJVs is not as important as understanding how the arrangements "represent a fundamentally new way for former foes, nonprofits versus for-profits, to work together in owning things; not just to work together or affiliating but owning things together. That is where their enormous importance in the future lies. That is the fundamental change."

He says the 2010 BJV in Florida of Shands Healthcare and its three University of Florida-affiliated hospitals by investor-owned HMA of Naples provides another good example of the changing sentiment.

"Historically,  you would not have seen someone like the University of Florida working with HMA, but that has been a rip-roaring success," Burgdorfer says.

"The University of Florida sold a majority stake in its rural hospitals surrounding Gainesville and retained full ownership of its tertiary academic medical center. They got a lot of money out of it. They no longer have to run these little county hospitals that they aren't good at running because they run big academic hospitals."

"HMA does a better job of running these little hospitals. That is their business. And the referrals are going up. They are all happy as a pig in mud," he says. "Hats off to the University of Florida to being willing to consider change like that. Most big nonprofits don't want to engage in that kind of change because they think for-profit companies are evil."