Is there gold in them thar hills?
That’s what hospital chain purchasers might be thinking now. When HCA became one of the biggest leveraged buyouts in history late last year, eyebrows were raised. Now, with the recently announced $6.4 billion purchase of Triad Hospitals, it’s possible that we’re entering another hot period for acquisitions.
History does repeat itself. Hospitals were hot commodities in the early 1980s, as HCA and other chains snapped up facilities to gain critical mass. Then, in the late 1980s, the chains began a series of financial maneuvers, including LBOs and spinoffs.
Today, from an investment standpoint, healthcare appears to be a ripe target for LBOs. Hospital companies have assets that can be sold or borrowed against to mitigate debt service. Interest rates are benign and appear to be stable, and venture capital funds have large cash positions and need to put that cash into play for investors.
And what better place than healthcare, where you can be sure that those aging baby boomers will eventually need hospital care? After all, the earliest wave of baby boomers will hit retirement age in 2011, and a four-year timeframe for exiting an investment is just what most funds want.
Triad was a likely candidate to follow HCA and become privately held. Its management was facing a hostile shareholder audience, it was at the low end of chain valuation and the pricing approximated that paid for HCA, according to Tom Gallucci, research analyst for Merrill Lynch.
But the buying fever may be both unwarranted and unwanted.
Healthcare is entering a period of great unknown, said Sheryl Skolnick, senior vice president for CRT Capital, an investment banking firm.
While it’s true that baby boomers will begin reaching their retirement years in droves, starting in the next decade, it’s far from certain that they’ll need the same type of healthcare as their parents, or if they’ll be using it early in their retirement years. The whole timing scenario may be wrong, and Skolnick contends that profitability estimates are based on old demographic studies.
There’s also great uncertainty swirling around Medicare and whether its trust funds can sustain a higher level of care without going bankrupt earlier. Scenarios suggesting Medicare fund bailouts or radical restructurings only add conjecture to the picture, not reality.
Medicare reform proposals, such as the plan espoused by the Bush administration that would slash payments to disproportionate share hospitals, only highlight the volatility of potential reform solutions that could be considered and implemented.
But this is possibly the worst time for healthcare to be portrayed as a plaything for capital investors and entrepreneurs. It may only confirm the belief of some who contend that healthcare is all about profit and not about providing efficient, cost-effective and cost-preventing care.
Congress is not interested in reform that will increase spending on healthcare, nor does it appear to be open to providing the level of funding necessary to enable the industry to improve efficiency, for example by underwriting the costs of digitizing healthcare records. There are too many competing interests and too many budget items that cannot be reduced at this point, such as debt service and military interventions.
As pressures grow to shift the healthcare cost burden to consumers, away from employers and the federal government, the pressure will rise on healthcare organizations to increase their own efficiency and then fund operational improvements through those savings.
While the financial machinations may prove profitable for companies and shareholders in the near term, the current trend for the industry is obvious – healthcare organizations have a limited period of time to improve efficiency and effectiveness. That effort should start now, because in the new paradigm, inefficient and ineffective care won’t be tolerated or supported financially.