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The situation: A major, for-profit hospital chain offers cash to a local charitable foundation to buy a hospital property. The hospital chain wants full control, perhaps to sell the property at a better price. The Foundation sees the cash as an opportunity to expand its charitable community mission. Lutheran Hospital in 1995? Bayfront Health in 2017?

Bayfront Health is a St. Petersburg, Florida hospital, 20 percent owned by a local charitable foundation. The majority owner is CHS, Community Health Systems, the same for-profit hospital that owns Lutheran Health Network (LHN). Under CHS management, Bayfront is a 2 star, hospital with disappointing patient experience ratings and prices higher than the national average as reported by CMS Federal Medicare-Compare (see https://www.medicare.gov/hospitalcompare/profile.html…).

Is this a Win-Win scenario for St. Petersburg and CHS? Or, is this tedious familiarity? We live in Shark Tank times for hospital consolidation. Big hospital networks are swallowing small networks and small hospitals. Changes in government regulations can change profitability overnight. NICHE believes that Bayfront Health presents a continuing view into hospital buying and selling and into how joint ventures between owners are dissolved. The Bayfront proposal seeks to buy out a joint venture partner. Our own Lutheran and Dupont Hospitals are joint ventures between CHS and physicians, and we know the fate of Fort Wayne Physicians’ proposal to buy LHN from CHS. The offer was rejected as “a billion dollars too low” and the physicians were intimidated by threats of being separated from employment.

How do the offers compare? According to information gleaned from the Tampa Bay Times (http://www.tampabay.com/…/charitable-arm-looks-to-s…/2336025):
Bayfront Foundation owns 20 percent of the hospital and enjoyed $5.7 million in profits annually–its part of $27 million in profits.
CHS offered to buy them out for $26.5 million, a little more than 4.5 times their annual profit. LHN profits were about $283 million for the year, and physician ownership is roughly similar to that of Bayfront Health. The Fort Wayne physicians’ offer was said to be $2.4 billion.
The physicians’ offer would seem to have been more generous than CHS is offering Bayfront–over 8 times annual profit vs. the CHS offer of 4.5 times profit to Bayfront. And, the CHS claim of “a billion too low” would indicate they expected Fort Wayne Physicians to have offered 12 times annual earnings. That would seem to point to an expectation by the Bayfront foundation for $68 million, not merely $26.5 million, following the CHS guidelines in Fort Wayne.

Admittedly, these numbers are approximate at best, and the Fort Wayne numbers are from news reports as well. The large differences in multiples between offers, however, do leap off the page. This should not be surprising. CHS will represent its own interests and not necessarily its joint-venture partners in such matters. CHS is majority owner. The CEO and top 5 administrators were paid over $140 million in salary, benefits, options and bonuses over a 5 year period, according to Morningstar (http://insiders.morningstar.com/…/executive-compensation.ac…). They are well-paid to look after CHS interests, and their own. However, it’s still worth asking why the Bayfront offer seems to be so appealing when the Fort Wayne Physicians offer was summarily rejected.