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Coupling to Cope

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"New markets provide diversification and acquisitions in existing markets are considered when they can provide regional strength," he says. With operations in California, Texas, and New Mexico, the St. Joseph Health System also currently has three hospitals in Orange County California, which serves approximately 3 million people.

St. Joseph's recently acquired South Coast Medical Center in Laguna Beach, CA, for approximately $35 million. An asset purchase, South Coast Medical was folded into Mission Hospital, which is located in Mission Viejo in South Orange County, and was renamed Mission Hospital Laguna Beach.

The hospital is situated on the coast, overlooking the ocean; the property and land are valued at significantly more than the purchase price—making it a plum purchase for the system. "Because of our regional strength, the St. Joseph Health System was able to realize synergies in operations that an independent hospital couldn't. South Coast had operated at a loss for several years before the acquisition," says Randolph. "After the acquisition, Mission was immediately able realize a positive contribution from the acquisition."

Distressed investment
While South Coast Medical welcomed St. Joseph Health System, other facilities may not want the outside attention—more of which will likely transpire in 2010 as financially healthier systems once again look for ways to grow and aggressively begin to pursue weaker members of the herd.

"Since the summer of 2008, when the recession began in earnest, we've speculated that there would be a shakeout among the not-for-profit providers," says Steve Filton, CFO at the for-profit Universal Health Services based in King of Prussia, PA.

Universal Health Services is one of the country's largest hospital management companies and through its subsidiaries owns and operates more than 100 medical facilities in the United States and Puerto Rico. "As often occurs in a downturn, there are winners and losers and those who survive and those who don't. Those who have been weakened by this are more likely candidates for divestiture."

Filton notes, however, that hospitals in dire financial shape may actually not be the best candidates for purchase by stronger hospitals. He says Universal Health Services first looks to improve its market position, so it generally looks for hospitals that are market leaders or have the potential to be.

"We've always had the view that we never want to do acquisitions just to grow or because it's cheap," he says. Universal Health Services is also looking for facilities with a good reputation and sound financials.

Buyers are looking for hospitals that are underperforming financially or have underinvested capital, Filton says. "The reality is, once a hospital is at death's doorstep, it's not the best time to buy. You want to look for facilities that have been damaged to a degree by financial downturn and are looking to strengthen themselves."

That is a key factor to keep in mind for potential sellers seeking the shelter of an affiliation, he adds. Moreover, sellers need to decide, Filton says, whether their hospital is viable on its own or is stronger partnered.

Karen Minich-Pourshadi

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