At the Becker's Hospital Review Annual Meeting in Chicago on May 10, Scott Powder, senior vice president of strategic planning for Downers Grove, Ill.-based non-profit Advocate Health Care, Pete Lawson, executive vice president of development for Naples, Fla.-based for-profit Health Management Associates, and James Burgdorfer, principal with Juniper Advisory in Chicago, discussed the strategy behind for-profit and non-profit hospital system relationships. The session was moderated by Jordan Shields, principal with Juniper Advisory.
Here is an excerpt from the panel discussion, edited for clarity.
Jordan Shields: Pete, what have you been looking for in forming relationships? What are some structures HMA has put together?
Pete Lawson: These [for-profit/non-profit] models have been around for a while — 20 or 30 years, [and they go] in cycles of popularity. They've evolved in the last 10 years. In the early 2000s, when we acquired facilities, it was always a straight acquisition. But we found with [Triad Hospitals] — which was acquired by [Franklin, Tenn.-based] Community Health Systems a few years ago — they were landing a lot of transactions we were interested in because non-profit hospital boards were more interested in governance and retaining ownership of facilities. So we shifted gears.
Our first transaction was with Orlando (Fla.) Health, where they have seven hospitals, tertiary facilities and outlying smaller community hospitals. Health Management was an 80-percent owner, and Orlando Health was minority owner, and we continued to use that model in all our facilities. It started with relationships already built in the field.
As a company, we're looking at partnering with hospitals today in markets where we already are. You'll find HMA in 15 states, but you won't find us in Chicago. We just don't have a presence there, and it just wouldn't fit our mix as a hospital company. We offer a full 100 percent sale or asset lease and also the option of being a partner and staying with us. It ends up being a trustee decision. We do wrap with us a clinical affiliation or ownership interest with teaching hospitals. University of Florida had three community hospitals. They asked to partner with us, and their name and brand is on those facilities even though we're the majority owner.
JS: Scott, Advocate is recognized by people like me in the industry as having pursued a very interesting array of merger transactions. At the genesis, there was a consolidation of two systems. You have pursued a number of asset acquisitions, and most recently, [Elgin, Ill.-based] Sherman — a membership substitution merger. How have those been driven by circumstances versus what partner is looking for?
Scott Powder: Our strategy around partnerships is first and foremost — our goal is integration of care, or an integration of assets that lets us harvest the value of scale and the value of quality. The structure by which a partnership occurs is a byproduct of that requirement. The other thing [is] we generally are a pretty big believer in controlling, to the extent we can, how we allocate scarce capital resources. This is a comment I'll make on why everyone needs to think about for-profit/non-profit hospital partnerships: Access to capital varies greatly. You can do a lot of different models, and it ultimately depends on state of affairs at the hospital. We're open to a lot of different models, and we are starting to explore non-merger type models to achieve the network and scale goals we want without taking on capital requirements.
JS: Jamie, what's your view on how for-profits and non-profits [hospital systems] behave?
Jamie Burgdorfer: Non-profits and for-profits each think the other has the advantage. It's interesting to hear that, and I'm not sure who has the advantage. Second, the distinction between for-profit and non-profit hospitals has narrowed, but with the boards and people we work with, it hasn't fully narrowed.
And three, there is still variation around the country. Most joint ventures have taken place in small and midsize towns, very few in large towns. One large town where a large non-profit — sort of the Advocate of that town — has entered into joint ventures is Dallas. Dallas is the reverse of Chicago. Dallas has a highly mature, well-structured hospital industry with three large and well-capitalized companies, two non-profit and one for-profit. Chicago is extraordinarily fragmented. Advocate is the only large company in Chicago. In Dallas, [many] more combinations have occurred.
And on trends ahead:
SP: This is just a prediction, but my gut [tells me] we'll see a shift, even in markets like Chicago or Los Angeles [that are] fragmented and non-profit dominated. Non-profits are inefficient generators of capital. We don't have the capital to truly consolidate the markets. My belief is that the current consolidation is nothing compared to where we'll go in terms of much larger, regional or even national systems. We'll need more efficient sources of capital in order to do that.
Maybe we'll change our source of capital or partner with someone who has more efficiency access, and there will probably be more creative ways of doing that. It wouldn't shock me if you start seeing growth in a lot of these creative deals — even in markets that haven't historically had them.
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Here is an excerpt from the panel discussion, edited for clarity.
Jordan Shields: Pete, what have you been looking for in forming relationships? What are some structures HMA has put together?
Pete Lawson: These [for-profit/non-profit] models have been around for a while — 20 or 30 years, [and they go] in cycles of popularity. They've evolved in the last 10 years. In the early 2000s, when we acquired facilities, it was always a straight acquisition. But we found with [Triad Hospitals] — which was acquired by [Franklin, Tenn.-based] Community Health Systems a few years ago — they were landing a lot of transactions we were interested in because non-profit hospital boards were more interested in governance and retaining ownership of facilities. So we shifted gears.
Our first transaction was with Orlando (Fla.) Health, where they have seven hospitals, tertiary facilities and outlying smaller community hospitals. Health Management was an 80-percent owner, and Orlando Health was minority owner, and we continued to use that model in all our facilities. It started with relationships already built in the field.
As a company, we're looking at partnering with hospitals today in markets where we already are. You'll find HMA in 15 states, but you won't find us in Chicago. We just don't have a presence there, and it just wouldn't fit our mix as a hospital company. We offer a full 100 percent sale or asset lease and also the option of being a partner and staying with us. It ends up being a trustee decision. We do wrap with us a clinical affiliation or ownership interest with teaching hospitals. University of Florida had three community hospitals. They asked to partner with us, and their name and brand is on those facilities even though we're the majority owner.
JS: Scott, Advocate is recognized by people like me in the industry as having pursued a very interesting array of merger transactions. At the genesis, there was a consolidation of two systems. You have pursued a number of asset acquisitions, and most recently, [Elgin, Ill.-based] Sherman — a membership substitution merger. How have those been driven by circumstances versus what partner is looking for?
Scott Powder: Our strategy around partnerships is first and foremost — our goal is integration of care, or an integration of assets that lets us harvest the value of scale and the value of quality. The structure by which a partnership occurs is a byproduct of that requirement. The other thing [is] we generally are a pretty big believer in controlling, to the extent we can, how we allocate scarce capital resources. This is a comment I'll make on why everyone needs to think about for-profit/non-profit hospital partnerships: Access to capital varies greatly. You can do a lot of different models, and it ultimately depends on state of affairs at the hospital. We're open to a lot of different models, and we are starting to explore non-merger type models to achieve the network and scale goals we want without taking on capital requirements.
JS: Jamie, what's your view on how for-profits and non-profits [hospital systems] behave?
Jamie Burgdorfer: Non-profits and for-profits each think the other has the advantage. It's interesting to hear that, and I'm not sure who has the advantage. Second, the distinction between for-profit and non-profit hospitals has narrowed, but with the boards and people we work with, it hasn't fully narrowed.
And three, there is still variation around the country. Most joint ventures have taken place in small and midsize towns, very few in large towns. One large town where a large non-profit — sort of the Advocate of that town — has entered into joint ventures is Dallas. Dallas is the reverse of Chicago. Dallas has a highly mature, well-structured hospital industry with three large and well-capitalized companies, two non-profit and one for-profit. Chicago is extraordinarily fragmented. Advocate is the only large company in Chicago. In Dallas, [many] more combinations have occurred.
And on trends ahead:
SP: This is just a prediction, but my gut [tells me] we'll see a shift, even in markets like Chicago or Los Angeles [that are] fragmented and non-profit dominated. Non-profits are inefficient generators of capital. We don't have the capital to truly consolidate the markets. My belief is that the current consolidation is nothing compared to where we'll go in terms of much larger, regional or even national systems. We'll need more efficient sources of capital in order to do that.
Maybe we'll change our source of capital or partner with someone who has more efficiency access, and there will probably be more creative ways of doing that. It wouldn't shock me if you start seeing growth in a lot of these creative deals — even in markets that haven't historically had them.
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