Becker's Hospital Review

Sign up for the COMPLIMENTARY Becker's Hospital Review CEO Report & CFO Report E-Weeklies at www.BeckersHospitalReview.com or call (800) 417-2035 29 Creating Regional Health Networks: Q&A With LifePoint Hospitals CFO Jeff Sherman By Bob Herman  F or the past four years, Jeff Sherman has led the financial operations of Brentwood, Tenn.-based LifePoint Hospitals, one of the five largest acute-care, for-profit hospital networks in the country. Last year, LifePoint recorded more than $3.39 billion in total revenue, and this year, the company expects revenues to top $3.65 billion. A major reason behind the optimistic projections is an increase in its hospital base. Like many other for-profit hospital operators throughout the country, LifePoint has been ramping up its acquisitions of independent community hospitals, many of which are finding it harder to operate in today's healthcare environment without a parent company for support. Mr. Sherman says mergers and acquisitions in the hospital sector today are a lot more nuanced than before. The financial aspect is omnipresent, but companies like LifePoint are factoring in several other demographic and reform-based reasons as well, such as population growth and high-quality care delivery. Here, Mr. Sherman sheds some light on LifePoint's recent spate of hospital transactions, why the hospital M&A market will most likely continue to proliferate and how hospital CFOs today can make the right decisions. Question: LifePoint is one of the biggest players in the hospital market, and your organization has announced a flurry of acquisitions so far this year: Fauquier Health in Warrenton, Va., Bell Hospital in Ishpeming, Mich., and Portage Health in Hancock, Mich. Can you talk about these transactions and how they fit in LifePoint's strategy right now? Jeff Sherman: As a starting point, LifePoint operates 57 hospitals in 20 states. These communities are similar to the communities you just mentioned, and these acquisitions have been announced but not completed. In Michigan, the two announced acquisitions are very consistent with our strategy to form a regional network to provide the full continuum of care. We acquired Marquette General Hospital in September 2012 through Duke LifePoint Healthcare, our joint venture with Duke University Health System. Marquette is the only tertiary care hospital in the region, serving 300,000 residents in the Upper Peninsula of Michigan, and as we think about developing regional networks, Marquette represents the foundation of that network. The two additional acquisitions that have been announced up there lead to the full continuum of care, from the community level up to the tertiary level, and this represents a very exciting opportunity for us. Jeff Sherman Fauquier is another great opportunity. We currently own five hospitals in Virginia, and Fauquier is another outstanding hospital with the potential for growth. This is a state where we have a significant presence, and it makes sense to add to that. It will increase our market leverage. We are seeking hospitals in faster-growing communities with a more diversified employer base to complement our existing portfolio of hospitals. Our acquisitions over the last four years have been consistent with this approach, while offering clinical, financial and operational resources to help newly acquired hospitals grow and thrive in the future. Q: What are your general impressions of the hospital M&A market right now, even outside of LifePoint's moves? It's been at a feverish pace for the past three years — do you see this continuing? And what are the biggest factors behind it? JS: As we view it, there will continue to be a lot of activity going forward, especially for small community hospitals that aren't affiliated with a bigger system. As we think about hospitals and what are their reasons for looking to partner, there are a couple that stand out: accessing capital for growth and expansion and the ability to recruit physicians. LifePoint is recruiting more than 200 physicians per year, and the centralization of our resources for physician recruiting makes it easier for us. We have built the infrastructure to help do that, too. It's increasingly difficult for freestanding hospitals to navigate the regulatory environment, including the Affordable Care Act, meeting meaningful use, the ICD-10 conversion — even just daily Medicare and Medicaid changes that are coming out. We believe many hospitals can't afford the increasingly complex technology demands — HITECH, meaningful use, computerized physician order entry, clinical interfaces. At LifePoint, we have a quality department, an IT department, a compliance department, a revenue cycle department and others with re- sources to stay on top of these daily demands and changes. All of those factors and changes are continuing to exert pressure on unaffiliated hospitals. We think we're well-positioned to benefit from that. With the right emphasis on quality, and certainly with our partnership with Duke, we can help invest in the future. Communities and community hospitals are equally concerned about the acquiring company's ability to invest in the future. So, with our relatively low leverage and financial strength, we have the resources to compete and expand in those communities. Q: So does this mean that LifePoint has more acquisitions in mind this fiscal year? JS: We don't put out specific numerical targets, but over time, LifePoint will continue to acquire hospitals. It is difficult to predict the timing of when an acquisition will take place with local non-profit boards, county officials and, many times, state's attorney general involved. We're looking to grow both organically in our existing hospitals but also through acquisitions. With more and more hospitals looking for strategic partnerships and alliances, we believe we have a flexible approach that can be tailor-made for an individual hospital. Q: LifePoint's revenue topped $3.39 billion in FY 2012, an increase of 12 percent from FY 2011, while profit slipped 6.8 percent to $151.9 million. What do you see as the major

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