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"There's no high-quality organization out there that isn't also financially strong; to get there you need to grow. We started on these transactions over five years ago and the regulatory process for the first initiative took a long time; the second hospital took just four months," says Robert L. Glenning, executive vice president and CFO at HackensackUMC. "We looked at our situation and did an honest assessment of how we could achieve multiple and sometimes competing strategic goals for capital. We decided we needed to find a way to address how we could take on a new hospital without jeopardizing ourselves financially or losing sight of our mission."
Glenning says that by engaging LHP as a partner to help manage and operate these hospitals, HackensackUMC could keep its pocketbook out of risk and still align with the organizations.
"It was $190 million to just purchase HackensackUMC Mountainside; if we did that by ourselves that would've significantly impacted HackensackUMC's credit rating, and it would've only developed one community hospital. But our larger goal is to bring some stability to the region by being a well-run network that our community can depend on," he adds.
The HackensackUMC capital approach may be unique, but it's also on point with the industry trend toward consolidation. In the January HealthLeaders Media Intelligence Report M&A: Hospitals Take Control, 80% of healthcare leaders said they will have an M&A deal under way or will explore one in the next 12–18 months, and the prevailing reason was to shore up existing geographic markets. Also, HackensackUMC's use of private equity funds is in keeping with the widely reported slow and steady uptick in use of these firms in the healthcare space, though not all financial leaders see it as the right opportunity to pursue.
"Venture capitalists need to generate a substantial return," says Richard Magenheimer, CFO at Inova Health System in Falls Church, Va. Inova is a not-for-profit system that serves more than 2 million people per year and consists of five hospitals with more than 1,700 licensed beds and 16,000 employees. "Venture capital is probably one of the most expensive forms of financing; it can easily be 15%–20%. That's a very expensive form of financing, especially when you're talking about a bricks-and-mortar hospital. Plus, the venture capital hurdles can vary depending on the project; it can be very difficult to structure something with venture capital that works from a compliance standpoint."
In 2010, Inova Fairfax Hospital broke ground on the first phase of an $850 million campus improvement project. The three-phase, multiyear project is intended to upgrade the campus to meet increasing demand for services—particularly for senior patients and obstetrics patients—and continued population growth in the hospital's catchment area. It also took years to get under way; though ready to go to contract in 2009, and costing an estimated $1 billion, the project was deferred following the market downturn in 2008–2009.
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