Corporate parent set to change for Sparks, Summit hospitals

It’s official. Barring a surprise rejection from federal regulators, Community Health Systems will by the end of January be the new corporate parent of Sparks Health System in Fort Smith and Summit Medical Center in Van Buren.

A special meeting of Naples, Fla.-based Health Management Associates (HMA) shareholders was held Tuesday (Jan. 7), and HMA and Community Health reported Wednesday that 98.7% of the votes cast approved the merger. The votes cast totaled 81.7% of the outstanding HMA shares.

HMA acquired Sparks in a $138-million deal that closed Nov. 30, 2009. The company leases the Van Buren facility in which Summit Medical operates.

Sparks Health System includes Sparks Regional Medical Center, Sparks Clinic (an employed multi-specialty physician group), Sparks PremierCare physician-hospital organization, Sparks Home Health and the fully hospital-integrated Marvin Altman Fitness Center. Summit Medical Center is a fully accredited, 103-bed acute care hospital.

HMA operates 71 hospitals in 15 states with approximately 11,000 licensed beds.

Community Health Systems is almost double the size of HMA, and its hospital portfolio includes eight facilities in Arkansas. Those include four in Northwest Arkansas – Northwest Medical Center-Bentonville, Northwest Medical Center-Springdale, Siloam Springs Regional Hospital and Willow Creek Women’s Hospital.

DEAL HISTORY
The $7.6 billion deal from Franklin, Tenn.-based Community Health was announced in July 2013 and was approved by an HMA Board that was then ousted in a proxy fight pushed by New York City-based Glenview Management.

On Sept. 25, the newly installed HMA Board announced a review of the offer. Glenview had previously said the $13.78 per share offer was too low. Ultimately, the new HMA Board approved of the deal. The HMA Board now believes the deal is good for HMA shareholders.

Between Aug. 16 and Wednesday, the new Board met 11 times and held 18 committee meetings to review HMA operations and the acquisition offer. According to the statement, the acquisition study by several third-party firms determined “that a large initial investment would be necessary to build out HMA's information and clinical capabilities, among other things, and a successive long road to incremental value would not outweigh the benefits of accepting CHS's offer.”

"After conducting an extensive review in conjunction with our legal and financial advisors, we are confident that this transaction provides maximum value to HMA stockholders and represents the best path forward for the Company," Steve Shulman, Chairman of the Board, said in a statement issued in November 2013.

‘SIGNIFICANT STRATEGIC VALUE’
Wayne Smith, chairman of the Board, president and CEO of Community Health Systems, is optimistic and federal approval will happen soon.

“We are pleased that HMA stockholders have seen the significant strategic value in combining with CHS. We are working now to finalize regulatory approvals, and we expect to complete this transaction quickly so that we can integrate our two companies and deliver on our plans for long-term growth and value creation,” Smith said in a statement.

Officials with the companies said the deal should be complete by the end of January.

Community Health announced Jan. 7 it had received new loans totaling $3.26 billion to help finance the HMA deal and to refinance existing debt.

Shares of Community Health Systems (NYSE: CHS) closed Wednesday at $42.42, down $1.07. During the past 52 weeks, the share price has ranged from a $51.29 high to a $32.53 low.

CONSOLIDATION CONCERNS, ISSUES
A Dec. 11, 2013, report from the New England Journal of Medicine said the Affordable Care Act “has unleashed a merger frenzy” in the U.S. hospital industry. The article, which is presents an unfavorable view of hospital consolidation, said hospitals are hoping to secure market position and gain efficiencies to prepare for full implementation of the new health care law.

“The figures are impressive: 105 deals were reported in 2012 alone, up from 50 to 60 annually in the pre-ACA, pre-recession years of 2005–2007,” noted the Journal report.

The article also claimed that mergers may lead to higher prices without improving quality.

“Since the primary driver of growth in private spending in recent years has been price increases for health care services, a compelling argument can be made for putting the brakes on consolidation. Indeed, unless new public and private initiatives are developed to discourage consolidation and to support enforcement of antitrust law, most of these deals will proceed unchallenged,” noted the report.

An October 2013 report from Moody’s Investor Service indicated that hospital acquisitions will “likely continue at a high rate” as the company’s prepare for healthcare reform. Moody’s suggested a benefit for hospitals is that a larger hospital operator may have more power to negotiate with insurers. The report also suggested that larger hospital systems can “leverage administrative costs” during a period when reimbursement cuts have created margin challenges.

HIGHER PRICES
Dixon Hughes Goodman, a Hudson, Ohio-based consulting company, said in a Winter 2013 report that many hospitals are considering some form of “alignment” with other hospital companies.

“Many hospitals and health systems are pursuing alignment with other hospitals, and this movement to consolidation is likely to continue in the near term. In fact, only 13% of hospitals surveyed in 2012 intend to maintain independence from alignment with other hospitals or systems. For the other 87%, alignment is at least a consideration in their strategic plans,” noted the Dixon Hughes Goodman report.

A June 2012 report from the respected Robert Woods Johnson Foundation provided three key findings from a study of hospital consolidations.

• “Hospital consolidation generally results in higher prices. This is true across geographic markets and different data sources. When hospitals merge in already concentrated markets, the price increase can be dramatic, often exceeding 20 percent.”

• “Hospital competition improves quality of care. This is true under both administered price systems, such as Medicare and the English National Health Service, and market determined pricing such as the private health insurance market. The evidence is more mixed from studies of market determined systems, however.”

• “Physician-hospital consolidation has not led to either improved quality or reduced costs. Studies find that consolidation was primarily for the purpose of enhanced bargaining power with payers, and hence did not lead to true integration. Consolidation without integration does not lead to enhanced performance.”