NONPROFIT HOSPITALS: New Ventures Step Into Arena
"Profiting from nonprofit hospitals is back in fashion," the Wall Street Journal reports. Today's Journal profiles two new companies, Vanguard Health Systems and MissionHealth LLC, both seeking to invest in the not-for-profit hospital business. The Journal reports that despite the controversy surrounding Columbia/HCA Healthcare Corp.'s purchase of many not-for-profits, the interest in the area isn't surprising since nonprofit hospitals comprise more than 80% of U.S. hospitals and "actually make a lot of money. Returns of about 15% on net revenue are common, thanks in part to the fact that nonprofit hospitals don't pay taxes."
Unlike Columbia, Vanguard and MissionHealth, both based in Nashville, TN, will target "primarily established, well-run hospitals, offering those systems considerable autonomy." Both, it appears, hope to capitalize on the mistakes of Columbia, renowned for taking over management of community hospitals and "tightly squeez[ing] margins through layoffs and other stringent cost controls." Vanguard will focus on buying hospitals that are, or have "the potential to be, the leader in a region." The company will then expand that original purchase "through additional affiliations or acquisitions of hospitals, physician management firms, outpatient and other services spanning cities and suburbs." On Friday Vanguard "announced its first deal," the acquisition of nonprofit Maryvale Samaritan Medical Center in Phoenix, AZ. Vanguard is "in discussions with several hospital systems across the country, mostly in large metropolitan markets." The company is "going out of its way to reassure communities that they will still have strong input into their local hospitals" through regional boards that will help determine budgets, appointments and medical services offered.
"MissionHealth is seeking simply to become an investor in nonprofit hospitals," the Journal reports. "Relying on laws that permit nonprofits to own partnerships, MissionHealth will take equity positions in the nonprofits that will transfer the hospital's hard assets and operating profits into a partnership." While invested hospitals will retain their tax-exempt status, all funds transferred to MissionHealth will be taxable. And, "[s]ince MissionHealth is only looking at hospitals that already generate decent returns, the company will leave existing hospital management in place," unless a "hospital doesn't maintain 'a reasonable operating margin based on nonprofit industry standards.'" MissionHealth founder Joshua Nemzoff says he believes "[n]onprofit management expertise is as good as the for-profits." Hospital executives approached by MissionHealth "say they are intrigued" by the possibility of greater independence coupled with increased access to capital. Richard D'Amaro, head of KPMG Peat Marwick's health care practice, said "I have had clients who have sold to Tenet or Columbia or Quorum (Health Group Inc.) who I believe would not have sold if this had been available" (Sharpe, 2/2).