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Duke LifePoint, WestCare deal likely by spring

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Posted: Wednesday, November 6, 2013 2:00 pm

A corporate jet, a CEO who makes nearly $9 million a year in compensation, 58 hospitals totaling 6,565 beds in 20 states and more than 29,000 employees – if Duke LifePoint Healthcare buys WestCare, the nonprofit organization would join the seventh largest for-profit, acute-care hospital network in the nation.

WestCare Health System President and CEO Steve Heatherly said he expects to see an agreement signed within 30 to 45 days and the transaction completed in early spring.

The Duke University Health System, in previous hospital deals with LifePoint, has received a 3-percent stake in acquisitions. LifePoint would call the shots in day-to-day operations and overall financial strategy, plus the company would shape the work culture at WestCare’s two hospitals, 86-bed Harris Regional Hospital and 25-bed Swain County Hospital.

In choosing Duke LifePoint, WestCare rejected Mission Health, the largest hospital in Western North Carolina and the region’s main medical referral center. Mission Vice President Jon Yeatman said he could not elaborate on the Asheville hospital’s offer.

“If Mission were to be released from the confidentiality agreement, we would welcome the opportunity to describe the details of the proposal that we made,” he said.

Mission, in a statement released last week, accurately but pointedly described LifePoint as an out-of-state, for-profit company. Mission is a nonprofit. Duke LifePoint officials countered that the for-profit angle has been overstated. Differences are minor and all hospitals, for-profits and nonprofits alike, seek ways to be efficient and effective, said LifePoint’s Diane Huggins, vice president of corporate communications.

LifePoint, with annual revenues of about $3.5 billion, is a public company and its stock trades on Nasdaq (LPNT). Huggins minimized possible pressures to please shareholders. She said LifePoint does not pay shareholder dividends; rather, it reinvests capital into its hospitals.

“The notion that communities are required to ensure returns to shareholders is false and unfounded,” Huggins said.

Since forming a hospital network in 1999, the company states that it has invested $1.6 billion in its hospitals for capital improvements, new technology and physician recruitment. LifePoint recruits about 200 physicians a year, LifePoint Chief Financial Officer Jeff Sherman noted in an April question-and-answer interview with Beckers Hospital Review.

Putting aside the for-profit debate, LifePoint’s track record strongly hints of significant change to come at Harris and Swain hospitals if the deal goes through. LifePoint Chairman and CEO Bill Carpenter declined to offer specifics, saying the company and WestCare haven’t yet gone through due diligence, or a period of evaluation.

But, a review of documents filed by LifePoint with the U.S. Securities and Exchange Commission, transcripts of teleconference calls about quarterly earnings, public presentations by LifePoint’s leadership and interviews with key players, indicate this is what WestCare and the community might experience:

Hospital governance shared by the company and the community; local jobs potentially lost in certain nonclinical areas such as accounts payable, supply chain management and payroll services because LifePoint outsources those duties to another company; aggressive recruitment that results in more primary care physicians and specialists in key fields such as cardiology, oncology, urology and orthopedics; supply-side purchases as a hospital network, resulting in a 4- to 6-percent savings the day LifePoint takes over; new service lines developed to keep patients at home and away from competitors such as Mission Hospital; significant capital improvements, perhaps even including that new emergency room Harris has long wanted.

Duke brings clinical services (direct patient care) into the picture. Though the actual ownership portion of Duke’s marriage with LifePoint is small, it doesn’t appear to be simply gloss on the apple. SEC-filed documents and a review of news reports from hospitals purchased by Duke LifePoint show that the very name – Duke – and the university health system’s promise of medical excellence helps smooth the way for successful hospital acquisitions; pleasing hospital staff, physicians and community members alike.

Duke and LifePoint partnered for the first time when the company asked the university health system to oversee cardiovascular services at Danville (Va.) Regional Medical Center. Duke’s Dr. Harry Phillips said it was immediately clear that both parties shared a vision about the importance of quality.

“We truly came to believe we could transform care at the community level,” Phillips said.

WestCare’s Lucretia Stargell emphasized that despite LifePoint’s pairing with Duke a strong relationship remains with Mission, and that Harris and Swain need the WNC-based tertiary (major) care hospital for patients who require services not available locally.

CEO Carpenter said LifePoint would support WestCare’s previous relationships, such as the one with Mission.

“Quality care close to home is the best care,” he said.

LifePoint, a Brentwood, Tenn.-based company, has had robust financial success in markets similar to the one here.

“There’s a tremendous amount of potential,” CEO Carpenter said of Harris and Swain hospitals. “The important point is we want these hospitals to be everything they can be.”

LifePoint bought three hospitals last year, two of them with Duke. The three acquisitions total $400 million in annual revenues, according to an April 24, 2013, proxy statement. Other filings state LifePoint’s revenues increased 12.1 percent in 2012 and revenues tied to acquisitions increased 230.6 percent.

Carpenter, who was designated one of the nation’s 100 most influential people this year in healthcare by Modern Healthcare, described the company’s acquisition strategy in an annual report filed last year with the SEC.

“We believe that strategic acquisitions can supplement the organic growth in our existing markets,” Carpenter wrote. “We seek to acquire well-positioned hospitals in growing areas of the United States that we believe are fairly priced and could benefit from our management and strategic initiatives.”

LifePoint CFO Sherman said much the same, but more, in his interview with Beckers. “We have what we characterize as an aggressive but disciplined approach,” he said. “We perform a significant amount of due diligence to see if a hospital is a cultural fit for LifePoint … Essentially, we want to create a regional network to provide a local continuum of care, and we are looking at hospitals in communities with faster population growth and a more diversified employment base. The economic environment of the state and local community is also a factor.”

The rapidly changing healthcare marketplace poses significant challenges for community hospitals such as Harris and Swain. Their challenges are opportunities for LifePoint.

“It’s increasingly difficult for freestanding hospitals to navigate the regulatory environment … (and) the increasingly complex technology demands,” Sherman said. “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.”

Cut costs, increase services and attract more customers – the formula is simple, at least on paper, once LifePoint takes control. It buys hospitals at EBITDA target margins in the low- to mid-single digits. Within four years or so, the hospitals operate in the mid to high teens, according to a statement made by Sherman during a Feb. 15, 2013 teleconference call. EBITDA is earnings before interest, taxes, depreciation and amortization.

In other communities, Duke LifePoint deals have been 80-20, with Duke LifePoint owning the controlling interest. Duke LifePoint usually makes a significant capital-investment promise _ $45 million at Marie Parham Medical Center in Henderson – and generally sets up a community foundation – $30 million in that same community. LifePoint officials said the company in 2012 contributed $2.2 million to philanthropic causes in communities where it owns hospitals.

A community foundation serves multiple purposes. LifePoint gets a tax advantage and the community enjoys a return for its investment in the hospital. A community foundation also probably goes toward satisfying the state Attorney General’s office, though no one involved would discuss specifics. Attorney General Roy Cooper’s staff will review any Duke LifePoint-WestCare deal to ensure WestCare is “getting full and fair value for its assets,” according to Noelle Talley, public information officer for the state agency.

“Another key thing we look at is whether the assets were donated for a specific purpose (for example, money donated to a nonprofit hospital to fund a cardiac unit), and is that purpose being maintained,” Talley wrote in an email. The AG’s office also considers whether the parties exercised due diligence in negotiating the transaction and whether there were conflicts of interest.

WestCare Board Chairman Bunny Johns said details about a deal would be made public “to the extent” possible. There are confidentiality agreements in place, she said.

In addition to a community foundation, a WestCare deal with LifePoint could bring local benefits through ad valorem and sales taxes. WestCare is currently exempted because of its nonprofit status. The tax value of the WestCare property is about $10 million, County Manager Chuck Wooten said. Based on current tax rates, that means the county would realize $28,000 in property taxes and the town of Sylva would receive $30,000 annually.

“The local sales tax amount is a little harder to quantify,” Wooten said. “The bigger return may be from future investments, both capital and human.”

WestCare got here from there after a joint venture with Haywood County’s hospital soured.

WestCare in 2010 joined with Haywood Regional Medical Center to create MedWest Health System. The partnership stumbled financially, and WestCare and MedWest agreed that WestCare could sever its ties to Haywood. Technically, this hasn’t happened yet.

LifePoint is looking to buy Haywood, too, but any deal with that hospital is separate from one with WestCare.

“Insurmountable regulatory concerns” prevented Mission from reaching an agreement with Haywood, Mission’s Yeatman said.

A deal between LifePoint and Haywood wouldn’t change WestCare’s prospects, Johns said.

“WestCare will have its own dedicated pool of capital with which it can fund needed investments and its own service-area specific strategy-plan,” she said. “All of these are significant changes from the MedWest structure and strategy.”

WestCare has retained a measure of independence throughout the MedWest venture. Legally, Harris and Swain make up WestCare Inc., a “community asset” that is governed by the WestCare board of trustees, said WestCare’s Stargell.

Harris and Swain, like other community hospitals, are struggling in a health-care landscape in flux. President Obama’s signature health care law, the Affordable Care Act, has combined with the recession, changes in insurance coverage and other market variables to create “a general and sweeping change in the way hospitals deliver care and how they are reimbursed for that care,” WestCare Chairman Johns said.

The organization has been public about its need for money. Hospital officials have declined, however, to specify the amount required or discuss WestCare’s debt load.

“Capital is not necessarily a fix … but an infusion of dollars will help with funding projects that drive strategic growth to ensure a viable future for the hospitals in the communities they serve,” Johns said.

LifePoint goes to great lengths to seize on the word “community” in “community hospitals,” and to deliver a marketplace message of placing people above dollars. Even the company’s mission, “Making Communities Healthier,” speaks to that corporate-wide approach.

LifePoint learned from mistakes made eight years ago during the acquisition of the hospital in Danville, CEO Carpenter said. Things did not go well – the community, surprised by the purchase, was unhappy, according to news reports.

“When the transaction was announced, the community hospital was being sold,” Carpenter told Arab Health in a 2012 question-and-answer interview. “They didn’t understand the hospital’s financial and operational pressure … I’ve learned that we should be involved with all key constituency groups early in the process.”

Additionally, LifePoint developed a transition services division. That division is responsible for the operation of hospitals for the first few years following acquisition, he said.

Carpenter, in an SEC filing, said his company’s “commitment to quality” goes beyond competitive advantage.

“The people we treat in our communities are more than patients,” the CEO wrote. “They are our neighbors. …We invest heavily in improving the quality of care, the services available, and the overall health of our communities.”

LifePoint keeps charity care levels at its acquired hospitals the same or increases them, according to information provided by the company. In 2011, LifePoint stated that it contributed more than $2 million in charity care.

CORRECTION (Nov. 13, 2013): In a Nov. 7 article, The Sylva Herald reported LifePoint, a company that proposes to buy WestCare Health System, spent $2 million in 2011 in charity and uncompensated care. The correct amount is nearly $206 million. Additionally, Harris Regional Hospital would set up any community foundation formed, not LifePoint.

Sylva, NC

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