Issue link: https://beckershealthcare.uberflip.com/i/148059
Transaction & Valuation Issues 41 FEature Private Equity and Nonprofit Hospitals: Strange Bedfellows or Saving Grace? By Jim McLaughlin It's no secret that hospitals have been getting much friendlier with one another lately. Consolidation activity in the healthcare industry has been accelerating for several years, driven by changes in reimbursement, spikes in the rate of the uninsured and major shifts on the horizon in light of government health reforms. That's led systems small and large to buddy up in partnerships ranging from simple clinical affiliations to corporate mergers and sales. But, one type of transaction may be picking up in popularity: nonprofit hospitals and health systems partnering with private equity firms. That's been evidenced by three recent highprofile examples. In 2010, Boston-based Caritas Christi Health System was acquired by Steward Health System, an entity created by private equity group Cerberus Capital Management. In the same year, Nashville, Tenn.-based Vanguard Health Systems, owned by private equity firm Blackstone Group, bought out the ailing Detroit Medical Center. And Catholic health giant Ascension Health, based in St. Louis, formed a funding joint venture in 2011 with Oak Hill Capital Partners, also a private equity investor. The appeal of private equity "The major nonprofit systems around the country are talking strategically. They want to get bigger," often through partnering with others, says Adam Buchanan, vice president of municipal credit at Ziegler, a specialty healthcare investment bank. "I think the private equity side of it is a little more unique." Sometimes the smaller systems seek the big private equity-backed partners in order to stay relevant, as in the case of DMC, or in order to compete in a saturated market like Caritas in Boston, Mr. Buchanan says. But, the larger multistate system's use of private equity partnerships is for strategic purposes. "The Ascension Health System and Oakhill Private Equity Fund joint venture provides Ascension access to capital to acquire mission-driven smaller facilities and systems," he says. That model is one that's becoming a favorite of nonprofit buyers, says Jonathan Spees, a senior vice president with healthcare management consulting company The Camden Group and the founder and owner of two private equity- backed hospital companies. The for-profit entity buys up hospitals for the nonprofit partner in the joint venture. "Instead of using their own capital, [the nonprofit] gets to acquire ownership and at least some measure of control [over the acquired hospitals]," he explains. The private equity body is the taxpaying entity and pays a share of dividends or proceeds, but is not subject to the same nonprofit regulations. Communities, if they can be assuaged that charity care and services won't suffer, may support these agreements for the increased tax base a for-profit can bring. "Private equity's biggest draw for nonprofit hospitals is the access to capital made available in such partnerships," says Patrick Pilch, managing director at BDO Consulting. "Specifically, many hospitals are using private equity capital to secure the appropriate IT platforms, which provide connectivity that is essential under health reform. In addition to enabling significant investments in infrastructure and other capital investments, private equity capital can be particularly attractive because it may assume a system's liabilities as well as assets."