Capital Funding Deals Get Creative
For instance, in May 2010, North Shore-LIJ initiated an agreement to acquire the 652-bed Lenox Hill Hospital, which represented its first hospital in Manhattan. (The deal was finalized
in April 2011.) The partnership offered financial refuge for Lenox Hill Hospital—one of the last independent hospitals in New York City. Having no affiliated hospitals or networks of primary care doctors to feed patients into the 10-building complex, Lenox Hill found it was fighting a tide of declining admissions and carrying an operating loss with a five-year total of $165 million. Then in 2009, Moody's Investors Service downgraded Lenox Hill's credit rating to outlook "negative" and projected a possible $20 million operating loss for the hospital by the end of 2012. Shortly thereafter, the organization responded by putting out an RFP for potential partners.
"We had no presence in Manhattan, and we felt it was important to be there. So this was a very good opportunity from a strategy standpoint," Shapiro says. "But we also had to look at the organization to be sure we were compatible culturally, and we do monthly post-acquisition check-ins."
While the Lenox Hill merger allowed North Shore-LIJ to expand its market a strategic alliance with Hackensack (N.J.) University Health Network announced in March should serve to strengthen the credit standings of both organizations. But the outcome will depend on the programs generated by the endeavor through Hackensack University Medical Center, which is a leading tertiary provider that has created the clinical strength and depth of services that has allowed it to maintain a dominant (28.8%) market share in its service area, according to Moody's.
The alliance will allow both organizations to create joint programs and initiatives, but each entity stays independent and continues to be responsible for its own assets, operations, and liabilities. The as yet undefined programs will be jointly developed and the funding and operational management determined by a joint operating committee.
The alliance of North Shore-LIJ and HackensackUMC is an opportunity created by the current healthcare and economic environment, but HackensackUMC is also at the forefront of trying some unique capital lending transactions. In a recent transaction, Hackensack University Health Network, the parent company of HackensackUMC, created a joint venture with Dallas-based LHP Hospital Group, Inc., a for-profit company that forms joint ventures to own, operate, and manage acute care hospitals with not-for-profit partners. LHP served as an equity partner for the opening of two Hackensack-UMC hospitals: HackensackUMC at Pascack Valley in Westwood, N.J. and HackensackUMC Mountainside Hospital in Montclair, N.J.
In late 2007 and early 2008, HackensackUMC purchased a hospital's assets out of bankruptcy and negotiated a joint venture arrangement with LHP to reopen and refit the community hospital The agreement transitioned the former not-for-profit Pascack Valley Hospital into a for-profit one, and not-for-profit HackensackUMC holds a 35% interest in the facility and operations.
The HackensackUMC and LHP joint venture is written so HackensackUMC didn't need to invest any additional capital into the hospital; however, LHP is expected to contribute approximately $95 million, according to an LHP statement. Additionally, LHP and Hackensack partnered in a similar structure to take over the license for 365-bed Mountainside Hospital, a move that was approved by the state's attorney general in June.
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