In the world of hospital mergers and acquisitions, 2010 will stand out for at least two reasons: First, it will be the first time in several years that we'll see a significant uptick in M&A activity. Second, it will have been an unusually busy acquisition year for the taxable, for-profit hospital sector, according to M&A experts interviewed by FierceHealthcare.
"Not all of the [deals] are what we would have expected," Chris Myers, a director of healthcare practice at Navigant, tells FierceHealthcare about those acquisitions. "They must think they can make some money off those assets over the next couple of years."
Large chains that have been busy scooping up distressed properties may be indulging in wishful thinking, but it's possible they'll make money off of health reform. Some health systems or hospitals see a significant share of uninsured patients coming through the ER doors. If those same patients in the future carry insurance cards, they may bring in new reimbursements. Plus, if more people are covered, demand for services could rise.
For now, the industry is facing a slew of negative forces that are pushing prices and demand down. Cuts will be made to Medicare and Medicaid reimbursements. Sick people who are under- or uninsured may decide to just stay home and suck it up, rather than pay for preventative care out of their own pockets. This delay will further strain hospitals when they finally do show up for care.
With all those negative pressures, it's puzzling that anyone would want to acquire a hospital, especially those that are struggling. Yet, that's what happened in the following six deals. To learn more about each, read the profiles below.
The deal: Johns Hopkins Medicine acquired All Children's Hospital & Health System 
The price: This non-cash transaction is expected to close by the end of the year. No purchase or sale will be involved.
As non-profit institutions with long histories of treatment, teaching and research benefiting their communities and beyond, All Children's and Johns Hopkins Medicine share similar missions. But from the outside, All Children's seemed fairly self-reliant.
"I don't think All Children's was doing that badly that they needed to sell," says Joshua Nemzoff, president of Nemzoff & Co.
According to Dr. Edward Miller, dean and CEO of Johns Hopkins Medicine, All Children's was attractive because of its robust high quality clinical programs, its strong regional brand presence and very high quality leadership team. "My theory is that nonprofits don't sell unless they need to," Nemzoff adds. The geographic jump to Florida also surprised industry observers given that Hopkins' other facilities are based mostly in Maryland.
The deal: Community Health Systems, Inc. (NYSE: CYH) acquired Forum Health, a system of hospitals and other healthcare providers based in Youngstown, Ohio
The price: $120 million
Ardent, of Nashville, Tenn., had been courting bankrupt Forum Health when Community Health Systems swooped in at the last minute and engaged Ardent in a bidding war. In October, CYH offered $30 million more than Ardent's initial bid and committed significantly more for facility upgrades.
Nemzoff looked at Forum Health for several clients and always came to the same conclusion -- that his clients wouldn't want it. For starters, the demographics were horrendous; the hospital needed more capital and the area was highly unionized and plagued by extremely high unemployment.
"The upside wasn't apparent. It was like a garage sale," he says. "People were trying to sell stuff they didn't want. And if you don't want it, they'll throw it away." It's another example of a large chain buying distressed properties, added Navigant's Myers. "They must believe they can make some money off health reform."
The deal: Leonard Green & Partners, L.P. acquired Prospect Medical Holdings (NASDAQ: PZZ)
The price: $363 million (includes assumption of $158 million in debt)
Prospect Medical Holdings, which owns and operates five community-based hospitals in the greater Los Angeles area and manages HMO services in southern California, and Leonard Green & Partners--one of the nation's leading private equity firms with over $9 billion in equity commitments under management--might seem like an odd couple.
What's surprising about this deal is that this is Leonard Green's only facility-based investment, says Michael A. "Trey" Crabb, III, president of Nashville-based Health Strategy Partners, LLC, which provides healthcare organizations strategic M&A and capital raising advice. Prospect is a publicly traded hospital management company. Leonard Green's portfolio is heavy on retailers such as Petco, Whole Foods Market, Inc., and the Container Store. Leonard's other healthcare investments are a dental management company and IMS, the pharmaceutical market data company.
The deal: Cerberus Capital Management, L.P.'s new affiliate Steward Health Care System LLC, acquires Caritas Christi Health Care
The price: $895 million
This deal, which closed earlier this month, is a head-scratcher because Cerberus has not acquired a hospital system before, says Crabb. In fact, it's perhaps best known for buying an equity stake in Chrysler as it was going down the tubes. The deal saddles Cerberus with a hospital system that is nearly $500 million in debt, and the need to earn a private equity-sized return on its invested capital.
Unlike other financial sponsor deals, Cerberus made a direct investment in Caritas without a sponsor company running interference. And while other sponsors that invest in companies target multisite operations, Cerberus has invested in a single geography, the Boston area, says Crabb. It is possible Cerberus sees an opportunity to vertically integrate Caritas so that it could take advantage of the future of healthcare, which includes accountable care organizations.
The deal: Vanguard Health Systems acquires Detroit Medical Center
The (projected) price: $1.5 billion, including a commitment to fund $850M in capital upgrades. (It's due to close by the end of the year.) The cash purchase price is $391 million.
Detroit Medical Center has long served as a safety net for poor patients. Because it has been cash-poor, the CEO actually approached Vanguard for help reducing debt. Although financially wobbly, the nonprofit network of eight hospitals looked attractive enough to the for-profit that it made a deal DMC couldn't turn down.
The price that Vanguard is willing to pay for Detroit Medical Center is staggering, says Nemzoff. Plus, Detroit doesn't have one of the better economies in the country and it faces stiff competition from Henry Ford Hospital. "You cannot find another for-profit hospital company in the last 30 years that has ever spent anything like this amount of money in any urban market," Nemzoff says. "If I were DMC, I would get this deal closed as fast as I possibly can," he said a week before the close. "Vanguard is crazy." The only way Nemzoff can explain the deal is that Vanguard is spending someone else's money. "[Vanguard Chairman and CEO] Charlie Martin has Blackstone's credit card and he's buying whatever he wants," he says.
The deal: LifePoint Hospitals (NASDAQ: LPNT) acquired Sumner Regional Health Systems
The price: $157 million plus $60 million in capital investments in the system's hospitals over the next 10 years
Sumner started to experience financial problems a few years ago, and was headed toward bankruptcy. Even so, the four-hospital suburban Nashville chain drew 10 interested bidders that wanted to add assets in the hot local Middle Tennessee market, which some 350 healthcare companies call home.
Enter LifePoint, which really wanted the chain, and was willing to pay the highest price among many bidders from the local market. "I'm not sure anyone thought that they could get a $150 million purchase price for those assets," says Crabb. The cash price for the bankrupt three-market hospital system, he says, was higher than expected.