Strategic Partnerships Mergers and Acquisitions

Creative Partnership Maintains Community Hospital

May 11, 2018 2:16 pm

Strong relationships among leaders expedited this joint venture.

In April 2017, the city of Topeka, Kansas, faced the potential shutdown of St. Francis Hospital, one of only two hospitals serving the residents of its community. A hospital closure can cause significant repercussions to the surrounding area. The results are well documented and have been witnessed many times across the country. In the case of St. Francis Hospital, access to care would have been significantly diminished with the loss of a major healthcare provider that has more than 9,000 inpatient stays and 34,000 emergency department visitors annually. In addition, the hospital contributes significantly to the local economy by employing 1,600 workers.

St. Francis’s unfortunate situation is reflective of four trends related to the current wave of hospital consolidation activity.

  • Many community hospitals are facing significant financial challenges and ultimately the threat of closure.
  • Large systems are divesting assets in regions or states where they cannot achieve adequate scale or market share.
  • Consolidation activity involving academic medical centers (AMCs) and teaching hospitals has doubled over the past five years as they attempt to extend their reach and gain scale.
  • Healthcare systems are being pushed to pursue non-traditional alignments to address consolidation opportunities.

As background, St. Francis Hospital opened its doors in 1909 and was operated by Broomfield, Colorado-based Sisters of Charity of Leavenworth Health System (SCL Health). SCL Health is a not-for-profit operator of 10 hospitals located in Colorado, Montana, and Kansas. In 2013, SCL Health began to exit the Kansas market through the sale of two Kansas City hospitals to Prime Healthcare Services, which resulted in St. Francis Hospital representing its only remaining hospital asset in Kansas.

During the next several years, St. Francis Hospital suffered from negative operating margins resulting in a loss totaling $117 million over the last five years of operations. During this same period, the hospital was forgoing much-needed capital investment. In 2016, SCL Health embarked on a strategic options process to evaluate potential opportunities to secure a future for St. Francis Hospital through a sale of the hospital to a new owner. SCL Health spent more than a year pursuing potential buyers and failed to secure a solution, although multiple potential buyers were considered.

Ultimately, the unsuccessful sale led SCL Health to announce it would donate the hospital to a new owner, but if one could not be found, it would be forced to close the hospital in the summer of 2017. The announcement of the potential closure of St. Francis Hospital garnered much attention, including that of Gov. Sam Brownback.

With encouragement from the governor, the University of Kansas Health System (UKHS) agreed to assess the opportunity to acquire St. Francis Hospital. UKHS is led by its flagship hospital, 768-bed University of Kansas Hospital in Kansas City. UKHS is affiliated with and shares a campus with the University of Kansas School of Medicine, which enrolls more than 850 students.

During the same time period, UKHS completed its affiliation with Hays Medical Center (HMC), a 207-bed not-for-profit hospital in Hays, Kansas. By aligning with HMC, UHKS extended its reach, and added its first community hospital, extending its statewide network. AMCs such as UKHS have focused on expanding their clinical enterprise to enhance regional relevance and maintain strong margins. Thirty-one percent of announced hospital transactions in 2017 involved an AMC or teaching hospital, as compared to only 16 percent five years ago, according to Ponder & Co. data.

At the same time, the expanded clinical network would add a revenue base to support mission support payments at The University of Kansas School of Medicine. Medical schools across the country have become more dependent on funding from their affiliated clinical enterprises as medical education payment has flattened.

Although the acquisition of St. Francis hospital would help UKHS address some AMC challenges, the timing did not fit with many of UKHS’s financial and internal resources focused on HMC. Management did not want to dedicate the significant bandwidth needed to turn around St. Francis Hospital’s operations on their own: Turnaround situations are not their traditional focus. Was there a solution that would allow UKHS to continue growing but also maintain focus on current operations?

Relationship Building

The relationship between Ardent Health Services, a Brentwood, Tennessee, for-profit health system that operates 21 hospitals in seven Southwestern states, and UKHS dates back to an earlier LHP Hospital Group and UKHS exploration of another acquisition opportunity. Although LHP was acquired by Ardent in 2016, the management teams stayed in touch, allowing Ardent and UKHS to expedite a joint venture to pursue St. Francis Hospital.

David Vandewater, Ardent president and CEO, stated, “When we acquired LHP, we used the relationship they had with our Chief Development Officer, Dan Moen, and that put us in a position to create this partnership” (Commins, J., “Kansas Health, Ardent Finalize Purchase of St. Francis Health,” Health Leaders Media, Nov. 7, 2017). Without this quick turnaround, it would have been a challenge to form a joint venture and respond to SCL Health’s request for proposal in such a short period. A typical hospital transaction can be challenging with just two parties, but with a third, the complexity and time needed for completion greatly increases. Ardent and UKHS had to agree to the joint venture terms while also presenting a proposal to SCL Health. This included how to address the turnaround of St. Francis Hospital’s financial position, who would be responsible for joint venture operations, and which services would be provided by each organization.

In May 2017, the proposal submitted by the new joint venture, Ardent and UKHS, was selected by SCL Health. The joint venture’s governance structure is split evenly between Ardent and UKHS, although UKHS maintains a 25 percent minority equity ownership stake.

As part of the proposal, the joint venture company has committed to invest $50 million of capital within the first three years of operations under the joint venture. Ardent is responsible for the day-to-day operations of St. Francis, while UKHS provides clinical program support, physician support, and other financial resources.

The joint company allows UKHS to continue to grow as an organization without having to take on the full risk of financial and non-financial resources needed to position St. Francis Hospital for future success. St. Francis Hospital is now known as The University of Kansas Health System St. Francis Campus and has operated under the joint venture since November 2017.

The joint venture will continue to seek opportunities to deploy their best of breed model. For SCL Health, the joint venture allowed the organization to divest its remaining Kansas hospital and avoid closing operations, allowing it to refocus its efforts on its Colorado and Montana regions.

Unique Partnership

The joint venture brings together the strengths of both organizations—for UKHS, the University of Kansas brand, a major presence in the state, physician strength, and clinical excellence, and, for Ardent, community hospital operational expertise, turnaround experience, and substantial access to capital. The arrangement offers a solution that brings local leadership together and provides continued options for the community to access high-quality care.

While it may not be commonplace for a for-profit and an AMC to enter into a joint venture to acquire a hospital from a large healthcare system, it was this unique partnership that provided St. Francis Hospital a strong outcome and future.

Christopher Schoeplein is vice president, Ponder & Co.


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