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The Orange County Register (California)
Feb 01, 2004
by CHRIS KNAP, BERNARD WOLFSON and JAMES KELLEHER
Tenet sale a sign of times;
Big chains that have gobbled up smaller hospitals are now finding them less attractive.Tenet Healthcare's move to sell 19 California hospitals, including four in Orange County, may signal the end of a trend in which large, publicly traded chains have gobbled up smaller competitors and turned them into gold on Wall Street.
Health-care experts said last week that stringent state regulations and high labor costs are making small community hospitals increasingly unattractive to public corporations, which must justify their performance on Wall Street.
"Ten years ago, community hospitals were fighting against acquisition by the for-profits. Now the chains don't want them. I think we are going to see communities retake control of these hospitals,'' said Jamie Court, executive director, Foundation for Taxpayer and Consumer Rights.
Jim Lott, spokesman for the Hospital Association of Southern California, said that was already happening before Tenet's announcement.
"There's less consolidation, and things are moving more toward small systems and even individual hospitals,'' he said.
But Ralph Cygan, chief executive officer of UCI Medical Center, said it was premature to "sound the death knell'' of the large for-profit chains. "There are still plenty of states where reimbursement rates are attractive,'' he said. Tenet may just be looking for greener pastures.''
Tenet's climb to local market dominance began in 1995, when its predecessor, National Medical Enterprises, picked up two Orange County hospitals in a merger with American Medical International. In 1997, the combined company -- which later changed its name to Tenet -- bought Orinda Healthcare Corp., a smaller for-profit group, acquiring eight more hospitals in the county. The Orinda deal added 50 hospitals to Tenet's portfolio -- more than half its total.
The newly muscular company became the second- largest for-profit hospital group in the United States, generating strong earnings growth in the late 1990s -- growth, it turned out, that was closely tied to questionable revenue from Medicare. As Tenet's income soared the company became a darling of Wall Street, and its shares hit a high of $52 in October 2002.
The bubble burst that month when the government began investigating Medicare bills submitted by Tenet hospitals. Under pressure, the company agreed to a less-lucrative arrangement -- and its era of super earnings ended overnight. Shares closed Friday at $12.40.
Tenet owned or operated 10 hospitals in Orange County until August, when it pulled out of Santa Ana Hospital, a small neighborhood facility with limited services. Tenet now has nine hospitals in the county and wants to sell four of them: Western Medical Center-Santa Ana, Western Medical Center-Anaheim, Chapman Medical Center in Orange and Coastal Communities Hospital in Santa Ana.
In selling off more than a fourth of its hospitals nationwide, Tenet follows in the footsteps of its larger competitor, publicly traded HCA Inc., whose predecessor, Columbia/HCA, downsized sharply after the federal government began investigating its business practices in 1997. The investigation led to the indictment of company executives, and the new management sold 100 of its worst-performing hospitals. The trimming continued over the next few years.
Who might be interested
C. Duane Dauner, president of the California Healthcare Association, the state's hospital trade group, said Friday that "several interested buy ers have already contacted Tenet'' about the hospitals it hopes to sell.
One of the top candidates to purchase the facilities that Tenet hopes to abandon is Cath olic Healthcare West, the largest nonprofit chain in California, with 38 hospitals.
"Catholic Healthcare West is always interested in exploring options that would allow us to extend our healing ministry,'' said Mark Klein, vice president of corporate communications. "Obviously a situation has to make sense and has to be consistent with who we are.''
Others that might be interested:
Iasis Healthcare Corp., of Franklin, Tenn., a small chain with 14 hospitals in Florida, Texas, Arizona and Utah. Iasis is completing the purchase of a Tenet hospital in Nevada.
Ardent Healthcare Services of Nashville, Tenn., which owns 28 facilities in 13 states, including five in California. "We do acquire hospitals in urban and suburban areas. That's one of the ways we grow. But I can't speculate on individual properties,'' said Ardent's Shea Davis.
Vanguard Health Systems, also of Nashville, which owns 16 hospitals in Arizona, California, Illinois and Texas, including three small ones in Orange County -- Huntington Beach, West Anaheim and La Palma Intercommunity. Vanguard is seen as having synergies with the hospitals Tenet offered for sale, but it declined to comment.
HCA said last week it probably was not going to be interested in Tenet's properties.
Klein said Tenet's announcement speaks to the difficulties all hospitals face in California, which include seismic-safety regulations, mandatory nurse-to-patient ratios, and high wage and workers' compensation costs.
That message was echoed by Dauner, who said Tenet's decision ``says much more about our broken health-care system than it does about any single organization. All California hospitals are facing the same pressures as Tenet.''
But Court said California is underserved by hospitals -- and blamed for-profits for buying small hospitals and then closing them to cut costs.
"In the whole state there has been a shrinking capacity,'' Court said. "Chains like Tenet have come in and then downsized to maximize their profits. This is not about excess capacity. ... This is about making enough money.''
Court claimed the average wait in a Los Angeles County emergency room -- where Tenet plans to shed 14 hospitals -- is six hours. "Take away a few hospitals and it becomes eight hours, 10 hours. Mistakes start to happen. ... This is like jumping up and down on a very frail system.''
Tenet executives vowed to work to keep hospitals open, saying that if they did not find buyers the properties could be transferred to community-based foundations or other related entities.
Marcia Manker, CEO of Orange Coast Memorial, which is operated by the nonprofit MemorialCare Medical Centers, said the nonprofit model has proven more stable over time than the for-profit model.
Orange Coast has added a Breast Care Center, new operating rooms and new imaging equipment since Memorial bought it from FHP eight years ago, she said.
"What the community needs to realize here is that despite Tenet selling these hospitals, there is still a tremendous opportunity to build confidence in a health-care system that works,'' Manker said. "If communities are dedicated to keeping high-quality health care in their communities, they need to focus on local providers who are dedicated to the community, fo cus ing on quality, and
committed to investing in the community.''
Tenet officials said it will be months before there are any official announcements about possible buyers.
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