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Challenges and Opportunities Facing Community Hospitals

HealthLeaders magazine, September 13, 2009
HEALTHLEADERS: What differentiates LHP from other potential acquirers?

MOEN: Eighty-five percent of the hospitals in our country are nonprofit, and that percentage hasn't changed in 30 years. So if you want to grow, you must find ways to work with them. Our strategy is focused on partnering with these hospitals in such a way that they don't have to sell their assets or give up control of their hospital to accomplish their goals. The other differentiator is our collaborative culture, which makes our joint venture strategy work. Our board consists of a real "braintrust" of nonprofit hospital executives. Doug is on our board because he had been our partner at Triad at a partnered hospital in Denton, Texas. He's also running the biggest health system in Texas. We also have Gary Mecklenburg, former AHA chair and former CEO at Northwestern Memorial in Chicago; George Lynn, president emeritus at Atlanticare in New Jersey and the former two-time chair of the American Hospital Association; David Bernd, the CEO of Sentara in Norfolk and also a former AHA chair. Jim Tinker, the former CEO of Mercy Health Systems in Iowa, is also on it. We also have Don Halverstadt, MD, former chair of the University of Oklahoma Board of Regents, and Uwe Reinhardt, PhD, James Madison Professor of Economics at Princeton University, as LHP board members.

HEALTHLEADERS: Denny, talk about some of the joint venture projects you did at HCA and at Triad.

SHELTON: Every one of the projects we did was financially viable. It's a heck of a lot more fun when you're talking about doing right by the community than sitting around saying I wonder if we can squeeze another 1% or 2% on our margins. There's not a good hospital administrator in the country who can't squeeze margins. But you know what? Most guys who are really good administrators, that's not how they think.

HEALTHLEADERS: Imitation is the highest form of flattery. There are some other for-profits out there that are starting to say they love the joint venture model. Has that caused you concern?

SHELTON: No. I haven't seen anybody who's done it the way we've done it. And so I don't know that there's a single healthcare system out there that would do a deal where 20% equity would equate to 50% of the governance.

HEALTHLEADERS: You've structured LHP as a private company with deep-pocketed investors. How do you protect your partners if your company is ever sold?

MOEN: Our sponsors have a long-term view of the healthcare industry and are patient investors. They understand that our partners are choosing us for the long term.

DUBE: It's really important for the nonprofit board that's considering doing a deal with LHP to realize they're tough negotiators. And there are lots of negotiations in these deals. They're complicated joint venture transactions. So issues like rights of first refusal, buy-up rights and dilution provisions if there's a capital call are all very important and need to be considered in advance.

HEALTHLEADERS: Mark, when you were trying to make these decisions, what did you know about your other options?

BUCKALEW: We got to the point where our only conclusion was that we were looking for a partner that had the same cultural philosophies that we had.

HEALTHLEADERS: But did you know those partners existed?

BUCKALEW: We didn't have a clue. In fact our first experience with a hospital system was not a good one. When we went through the review of all the companies that we asked to provide information, I was shocked. In fact one of the things that surprised me was that there were not more nonprofit hospital systems doing deals. We were going to stay nonprofit no matter what it took. So we got Monte's help to clarify what those options were.

HEALTHLEADERS: How did you identify Monte?

BUCKALEW: Monte represented the county.

DUBE: Lots of independent community hospitals, especially those that are in financial distress or No. 3 in a three-hospital town, tend to undervalue themselves. So there's nothing like an RFP or auction process to enable a nonprofit board to get better educated about their value in the marketplace.

HEALTHLEADERS: So is that what you did for Portneuf?

DUBE: There was an RFP process in which we solicited from nonprofit and for-profit companies their interest. You learn a lot about companies during the process. Denny and Dan spent a lot of time in public meetings. And there was an enormous amount of due diligence done, not just legal, but also operational. Many members of the medical staff were doing extensive phone trees to check with other community hospitals on the three finalists to see whether, in their experience, they walked the walk or just talked the talk.

BUCKALEW: It was one of the great periods of my existence on the board that I felt like it was a team effort by doctors, physicians, the board, the county commissioners, and the community. And the vote was a 77% approval rate, which we would have never gotten on a bond issue.

HEALTHLEADERS: How many proposals did you get back in the Portneuf situation?

DUBE: We started with about a dozen.

SHELTON: We've always felt that a strong due diligence process helps us. When we were doing these projects at Triad, we weren't the high bidder on a number of projects we ultimately got. They have to decide what constitutes value. Part of it is money and part of it is culture. So you have to balance that and when people go through the process they end up making a much more informed decision. The problem is some guy like Monte Dube comes in and then tries to squeeze you on price [laughter].

HEALTHLEADERS: Dan, explain how your joint venture model helps the community.

MOEN: Portneuf's foundation had minimal assets and their job each year was to have fundraising events to raise money to support Portneuf Medical Center. Today, the foundation has approximately $60 million in assets, which includes a substantial interest in a new $150 million hospital, which the community badly needed. Going forward, that foundation is focused on doing other good works in the community with its assets. They have created the fifth largest foundation in the state of Idaho. In addition, the foundation did not sell its hospital or give up control of it.

We are a new company, but it's a team with 30 years of experience in managing community hospitals. Experience matters, as does a successful track record. We are not practicing!

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