Foiled Acquisition Puts Hospital in Long-term Limbo

When a hospital is caught in the middle of a fight between a multi-state for-profit hospital chain and state leaders, the result is chronic, long-term uncertainty. That's no way to run a business.

Tenet's long-running attempt to buy five hospitals in Connecticut was a struggle between behemoths. Born from a smaller-scale deal between Vanguard Health Systems, which was acquired by Tenet Healthcare in the middle of negotiations with the state, the deal would have expanded the population of for-profit hospitals in Connecticut from one to six of the state's 29 total hospitals.

That caused problems. Lots of problems.

At times, it seemed the deal would go through imminently. But another regulator, another issue, would inevitably pop up, complicating things. Ultimately, after governors, attorneys general, a state healthcare commission and the legislature all had their say, it wasn't meant to be.

Final restrictions placed on Tenet over staffing, service, and pricing at the five hospitals prompted it to withdraw its application to buy the hospitals. Two years of work between state leaders and the national for-profit chain, not to mention expense and chronic uncertainty for the hospital went up in smoke.

Tenet's final decision to walk away came only shortly after the state's Office of Healthcare Access made it known that changes in staffing, services, and pricing would be prohibited for five years following the acquisition of the hospitals by a proposed partnership between Tenet and Yale New Haven Hospital. That proved a bridge too far.

The deal lived through two legislative sessions, many different proposals and players, and at least two resuscitations before ultimately dying over the latest demands from the state.

There's blame to go around on both sides, but very little rancor, at least from official channels, even though the future of financially troubled Waterbury Hospital, also part of the deal, is now in serious question.

Other hospitals that were involved, including 154-bed Bristol Hospital, are in much more stable situations financially, but still suffered as a result of the failed deal. "Part of the reason we're in this situation is that we need to get some economies and other resources," says Bristol Hospital President and CEO Kurt Barwis, whose hospital was one of the proposed acquisitions by Tenet. "I get that communities have opinions and feelings, but they all came together and were heard and we thought there was an agreement."

Barwis recounts how one year into the process, when Tenet was first on the verge of abandoning the deal, Governor Dannel Malloy (D) encouraged the company to see it through, and insisted that differences could be bridged.

Tenet did return to negotiations only to hear about the strict terms of acquisition insisted upon by the state Office of Healthcare Access. Ten days later, Tenet issued this media release. This time, it looks like there will be no reprieve. That's just fine for Barwis, who supported the deal that would roll up his hospital and four others from the outset. But despite that support, and more importantly, after two years plus of uncertainty, he is relieved that finally, there is resolution.

Although he regrets nothing about his organization's part in the process, ultimately, its outcome robbed the hospital and its leadership team of critical time to reposition the hospital for a very different, value-based future. It will take years to recover, he says.

Barwis and his board started that process with the Tenet deal three years ago, in the middle of a financial downturn, amid problems with the state budget in which there were more recipients for Medicaid while resources were being pulled away, he says.

"So my board went out and found a way," he says.

But as the process dragged on, a couple of things changed.

"One, our financial situation improved so much, that the first time Tenet pulled out a year ago, we went out and were able to secure refinancing of our debt and borrow for our strategic plan. And at the same time, we had signed a network relationship with Yale New Haven and service lines were developing very well," he says.

Tallying the Costs of Uncertainty
When the process of reeling Tenet back into negotiations restarted, however, it was tough for Bristol Hospital to "get on with our life," as Barwis puts it.

"We wanted to get back to building our emerging clinically integrated network," he says. But you can't do that as long as the lenders of capital think they're going to get knocked out when Tenet comes back. "So you start to reflect on all you can't do, and the list starts to grow longer and longer in your mind," says Barwis. "I'm in nowhereland and I can't execute."

Not only that, but employees are caught up in the uncertainty, too. Barwis says local media always asked him how much was spent on legal fees and consulting surrounding Tenet's proposed acquisition, but he says that's absolutely dwarfed by the problems the long-term uncertainty created.

"I'm a finance guy by training and people ask me all the time how much we spent on legal and consulting fees, which is easy to quantify. But the other thing people don't quantify is the need to close the transaction," he says.

There was, for instance, a defined benefit pension plan that had to be frozen. To reduce risk as the transaction moved toward completion, the manager had to move from a long position to very short position aimed at removing risk of not having the cash needed at closing of the transaction. As a result, that fund missed a huge run in equities.

"We missed a whole bunch of upside in the defined benefit pension plan, which has nothing to do with what we've spent on the deal, but everything to do with our viability going forward," he says.

Bristol has also always had great corporate partners in philanthropy, says Barwis. When it became likely the hospital would be bought by a for-profit, they changed their giving.

"The moment we say we're going for profit, that money gets reallocated to someone else," he says. "Now this deal's not going to happen, so how do I get that back? It will literally take years."

And the uncertainty and opportunity cost also rears its head in the little things no one thinks of, says Barwis. Last summer, during one of his regular lunches with rank and file employees, two maintenance workers mentioned that they wanted to borrow from their pension plan for college tuition in one case and to purchase a home in the other.

Barwis had to strongly advise against borrowing because any loans would become due on a change in ownership, and workers would also be subject to a 10% tax penalty.

Despite the reluctance of investors to refinance the hospital's debt, Bristol was able to finally refinance on favorable terms once it became clear the Tenet deal was verifiably, "nail-in-the-coffin dead," says Barwis.

Lenders should have been happy to step up. Bristol finished 2014 with 8.5% revenue growth.

"At least for us, we had something to fall back on," he says. "I've talked to the other CEOs, and some of them are in great shape, but others have laid off people," he says.

"It's really unfortunate for those that are struggling right now. You had to get your medical staff convinced, prepare them, and part of that journey is you try to give them a clear indication of why that [Tenet-owned] future is better, and then you're stuck with saying now we have to make some hard decisions. Two of those hospitals will have to figure out the future without a capital infusion."