Skaggs lands financial backer with Cox merger

After five consecutive years of operational losses, the Skaggs Regional Medical Center Board of Trustees voted 98-0 in favor of establishing a strategic partnership with CoxHealth on Sept. 20.

At the crux of the agreement, CoxHealth is prepared to make a $25 million to $35 million gift to the Skaggs Foundation upon federal regulatory approvals expected by the end of the year and invest a sum of roughly $100 million, including debt assumption, during the next five to seven years, said CoxHealth CEO Steve Edwards.

“They needed help. It is a good hospital that was struggling financially,” Edwards said. “We consider it our mission to cover Stone and Taney counties, so this was an extension of our mission.”

The move, which is designed to give a jolt in capital improvements to the Branson health system that employs 1,100 workers, is the result of requests for proposal Skaggs issued in January and was answered by more than a dozen qualified candidates, according to Skaggs CEO William Mahoney.

Mahoney said Skaggs was impressed by Edwards’ vision for the future of health care in southwest Missouri, as well as CoxHealth’s commitment to invest in new technologies, facilities, physician recruiting and expanding service lines.

Skaggs signed a letter of intent to form the partnership with CoxHealth in late June after holding on-campus interviews with two finalists earlier that month. Brentwood, Tenn.-based LifePoint Hospitals also was in the running to merge with the 165-bed community-owned hospital.

“It wasn’t because we offered more money, I’m sure of that,” Edwards said. “I think it had more to do with (Skaggs’) sense of what is better for it in the long run. We’ve made commitments to capital improvements. We’ve given them a voice in governance, including seats on our board. We really believe health care should remain local as much as possible, so we tried to craft an agreement that allows the relative autonomy they need, while we can, at the same time, optimize our operations together to become more efficient.”

Skaggs spokeswoman Michelle Leroux said terms of the LifePoint offer are confidential.

Under the deal with CoxHealth, Skaggs would keep its name, board of directors, current employees, management and medical staff. Edwards said the agreement does not amount to an acquisition, rather Skaggs would operate as a subsidiary of CoxHealth.

“It is legally described as a member substitution,” Edwards said. “That is more commonly what not-for-profits would do.”

On Sept. 28, CoxHealth submitted a Hart-Scott-Rodino filing under the federal premerger notification program, letting the Federal Trade Commission and the U.S. Department of Justice know the system is pursuing a member substitution. Edwards said he expects federal regulators to address questions it has about the merger within a 30-day period. While there could be some back and forth to answer questions, if there are no concerns listed within that window, Edwards said CoxHealth and Skaggs could begin to work together to join their operations.

“We’ve chosen not to plan the integration of our operations until that filing is done, because we don’t want to be doing anything that could be perceived as acting against antitrust concerns,” Edwards said.

Today’s environment
A challenging health care environment was the impetus behind Skaggs’ efforts, Mahoney said.

For example, increases in the percentage of Medicaid and Medicare patients and emergency room visits are a reality for many community hospitals. During fiscal 2011, two out of three Skaggs patients received care through Medicare or Medicaid. At Skaggs, Medicaid payments increased to 11.2 percent of all payments in fiscal 2011 from 9.9 percent in fiscal 2008. Medicare payments rose to 55.2 percent of all payments in fiscal 2011, up from 52.6 percent three years prior. During the same period, costly emergency room care jumped more than 15 percent, according to hospital officials.

“Across the nation, what you are seeing is the smaller, independent hospitals are having an inability to get capital to update facilities and technologies,” Mahoney said. “This is why you are seeing a record pace of mergers and acquisitions. And I think you will continue to see that across the nation because the smaller hospitals don’t have access to the type of capital that bigger systems have.”

M&A activity
In February, Norwalk, Conn.-based Irving Levin Associates Inc., a firm that studies data related to merger-and-acquisition activity in finance, health care and senior living industries, reported that 86 hospital M&A deals were completed in 2011, the highest number in the past decade. In 2010, 75 health care mergers took place and 51 were finalized in 2009. The data indicate that more than $86 billion worth of health care-related transactions have taken place in the U.S. since 2002.

Steve Monroe, managing editor of publications for Irving Levin Associates, said with the prospect of more patients being insured through health care reform, hospital systems began preparing for an increase in patients. That often meant smaller systems such as Skaggs looking to become financially viable through mergers or acquisitions.

“The smaller you are, and the less profitable you are, the harder it is going to be for you to survive,” Monroe said.

Monroe said while mergers have been on the rise, he thinks activity across the country may have plateaued. Through the first three quarters of 2012, there have been 65 hospital mergers announced, four fewer than the number of mergers during the same period last year.

Edwards said the agreement might not immediately benefit CoxHealth’s bottom line, but he still felt the partnership was important to pursue.

“Working together, we can carve out costs from both systems and grow both systems, simultaneously,” Edwards said. “There are efficiencies to be found in being bigger, and with health care reform, having a bigger footprint puts us in a better position to compete.”