Renewed Hospital M&A Activity May Drive Surge in Joint Ventures

After several years of relative quiet on the hospital merger & acquisition front, 2010 may be the year things turn around, say those on the front lines. Jim Shannon, executive vice president of development for LHP Hospital Group, a privately held company that provides capital to not-for-profit hospitals and systems through joint-venture arrangements, shares some thoughts about what to expect in the year ahead.

Hospitals seek growth through shared governance
LHP Hospital Group was formed in 2008 by the former executive team of Triad Hospitals, which had just been acquired by Community Health Systems. Based in Plano, Texas, LHP typically partners with hospitals by creating a limited liability company to own and operate a joint-venture hospital that could be an existing hospital, a target acquisition or a new facility being developed.

In these arrangements, the hospital gains access to needed capital while maintaining a collaborative culture, and LHP reaps returns if and when the hospital partner grows its market share. The ideal target for such an arrangement is a hospital in a high-growth market with positive demographics and an underserved market, or a facility near a metropolitan area that could benefit from stemming the tide of outmigration, Mr. Shannon says.

After a quiet period, forces are combining to make this year a tipping point for hospital consolidation, and hospitals needing to upgrade facilities, add physicians or install technology will be looking for partners, Mr. Shannon says. "It looks like the dam may have burst," he says. Already several large deals have been announced, and LHP itself has seen "an explosion" of leads, he says.

"We see opportunities in small cities, we see opportunities in urban marketplaces," he says. Some of the traditional sources of these leads, such as investment banks that had been sidelined in recent years by the economic crisis, are becoming more active, he says, and the bond market is beginning to thaw, at least for hospitals with good credit.

But that still leaves financially struggling hospitals facing a difficult environment for raising capital, Mr. Shannon says. Under LHP's shared governance model, an LHP subsidiary provides a cash contribution, the not-for-profit hospital partner contributes assets (or cash), and they create a joint venture. Generally, LHP owns 50-80 percent of the venture, while the not-for-profit owns 20-50 percent. LHP will manage the facility under a management agreement, but so long as the not-for-profit partner maintains at least a 20-percent ownership stake, LHP shares governance of the facility 50/50, Mr. Shannon says. This gives the not-for-profit partner more governance control than many other traditional joint venture models.

"If you do due diligence and know there is a compatible vision, and that we can bring the strategic solution to that local market, then we are comfortable that as long as there's a reasonable amount of skin in the game, everybody plays fair," he explains. "I have yet to find a not-for-profit board of any hospital I've encountered that didn't want their hospital to be successful."

What's in the pipeline
LHP currently has two joint ventures completed and is in the process of getting regulatory approvals for a third. The company expects to complete three to five deals per year going forward. While not every hospital looking for capital is an appropriate joint-venture candidate, Mr. Shannon says the model is likely to satisfy a need in coming years, as healthcare reform leads to more usage of the healthcare system and a greater need for hospital beds.

"The joint venture model has reached a place where it meets a very specific need in the marketplace," he says. "Hospitals will have to respond with capital and will have to be able to expand to meet this need. With capital markets the way they are, it is only the top tier that have ready access to the bond markets. For the middle and bottom third it is harder than ever to access the bond markets."

The joint-venture model, Mr. Shannon says, "provides an alternative other than turning the keys over to somebody else and hoping they do right by your community."

Learn more about LHP Hospital Group.