May 23, 2013 / 11:15 AM / 5 years ago

Hospital firms say research tie-ups can clinch takeovers

NEW YORK (Reuters) - Hospital companies that tie up with top medical research facilities to improve their access to the latest treatments and bolster their reputations are increasingly finding the partnerships also make it easier for them to do takeovers.

The boards of many community-based hospitals, which are prepared to surrender their non-profit status in such a deal, care not only about the price they are paid, but how the new entity will be perceived by patients.

When Bill Carpenter, chief executive of LifePoint Hospitals (LPNT.O), decided to partner with Duke University Health Systems in 2011, renowned for its heart, cancer and neonatology programs, he knew the joint venture would improve his hospital chain’s clinical services. But he did not fully appreciate how the partnership would help LifePoint convince wary hospitals to accept takeover offers.

“Many community based hospitals are trying to figure out how they will continue to be relevant in their communities,” Carpenter told Reuters. “The Duke LifePoint brand is very attractive to these hospitals as they are trying to differentiate themselves.”

Since President Barack Obama’s big healthcare reform was passed in 2010, there has been a wave of consolidation - more than 650 deals for hospitals, according to Thomson Reuters data - as they seek to protect themselves against increasing costs and lower reimbursement fees from the government.

Duke LifePoint Healthcare, which is the new joint venture’s name, has acquired five hospitals, including Marquette General Health System in Michigan and DLP Cardiac Partners in Charlotte, North Carolina since the partnership was established in 2011. Both Duke and LifePoint have ownership in the new entity, but financial terms of the agreement were not disclosed.

When Marquette General Hospital was for sale last year, at least 10 other bidders came to the table. But in the end, Duke LifePoint won largely because of its affiliation with Duke, said Carpenter and two others familiar with the situation.


“These deals are often not just about who can pay a dollar more,” said Toby King, managing director in the global healthcare group at Citigroup. “The sellers of these not-for-profits put significant value on how the acquirer will invest in and improve the quality of care in the community going forward.”

Other big, for-profit hospital providers are forging similar partnerships. In March, Community Health Systems (CHS.N) teamed up with the Cleveland Clinic, famed for its cardiac care.

Under their agreement, the world-famous medical research facility will provide CHS’s hospitals and doctors with improved metrics to monitor care outcomes. Under Obamacare, more formally known as the Affordable Care Act, hospital reimbursements will be linked to patient outcomes.

Cleveland Clinic has been publishing its outcomes, such as mortality rates and infection rates, for almost 10 years. That ability to monitor and improve outcomes is increasingly important in the wake of health care reform, CHS Chief Executive Wayne Smith told Reuters.

CHS has since been approached by several hospitals that are actively pursuing or considering a sale to see if CHS is interested in acquiring them, Smith said. No further acquisitions have been made since the partnership was announced.

Dallas-based Tenet Healthcare Corp (THC.N) is interested in similar arrangements, albeit on a more local level, Tenet CEO Trevor Fetter said at the Reuters Health Summit this month.

“This is still a very local business,” Fetter said. “The appeal of an affiliation, we think, is more likely to be driven locally than it would be through some national brand.”

    Such arrangements can be helpful, among other things, to help stand out among other bidders when hospitals are for sale, Fetter said. “There’s a line around the block for non-distressed assets,” he added.


    The boards of community hospitals tend to be made up of physicians and scientists who are looking for more than the best price with these deals.

    “Some nonprofit boards have concerns about for-profit ownership,” said Bruce Kelley, an investment banker with Dallas-based First Southwest. “These joint ventures can allay some of those concerns.”

    For Cleveland Clinic, having access to CHS’s 135 hospitals to provide increased revenue and referrals is attractive, said Dr. Toby Cosgrove, Cleveland Clinic’s CEO. Unlike the Duke LifePoint agreement, the Cleveland Clinic/CHS partnership is more centered on sharing resources and brands, rather than ownership exchange.

    “We didn’t have to do this, but we are looking for ways that we can expand because we think we need to grow in size,” he said.

    For research facilities like Cleveland Clinic, such conversations with big for-profit hospital operators were unheard of five years ago before healthcare reform was first proposed, Cosgrove said.

    “It is a sign of the changing times,” Cosgrove said. “I don’t think the economic pressure was so much on us and I don’t think the need for quality transparency was so much on CHS.”

    Additional reporting by Susan Kelly; Editing by Michele Gershberg and Leslie Gevirtz

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