Memorial: An easy sell?

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Memorial Health Systems could be sold quickly, analysts said.

If the city decides to sell Memorial Health, finding a buyer for the publicly owned, two-hospital system shouldn’t be a problem.

Although it has seen lean years, Memorial today has some of the key characteristics that hospital owners look for when they expand to a new market:

a promising location with strong demographics;

financial stability;

a healthy share of the market.

The Colorado Springs City Council appointed a commission last year to look into whether changes should be made to Memorial’s ownership or governance amid concerns that the rising cost of indigent care might someday lead to a taxpayer bailout. The question has repeatedly surfaced over the past two decades. The commission has until fall 2010 to make recommendations about the ownership of the hospital to city council.

Several options are possible: the commission could recommend the city hold onto its ownership of the 671-bed hospital, sell it off, spin it off as an independent entity, or enter a joint management venture with an outside firm.

The hospital system was valued at $388 million, according to a valuation provided to the Sustainable Funding Committee in 2008.

Hospital mergers and acquisitions are big business. A total of 53 hospitals were sold last year for a total of $1.6 billion. The year before was even bigger, with 60 deals valued at $2.5 billion.

“The question is — is it an attractive market for a buyer?” asked Sandy Steever, editor of Health Care M&A Monthly, a publication that tracks mergers and acquisitions in the industry.

Financial stability

In assessing the system, prospective buyers will look at profitability, how much debt it is carrying and whether the market has too many or too few beds.

Regarding location and demographics, Colorado Springs, not surprisingly, would be attractive, in part because of its growth and the presence of four military bases with plenty of young families.

The Pikes Peak area grew by 20 percent from 1997 to 2007.

“The Air Force bases don’t have hospitals, so that means they would use the local ones. It’s a built-in market for services,” Steever said.

Memorial’s financial performance, meanwhile, is improving.

The system, which gets no tax support despite being owned by taxpayers, is carrying about $350 million in debt, most of it used to build Memorial North on Briargate Boulevard. That sounds like a lot of money, but the system’s debt-to-equity ratio is within reason, said chief financial officer Mike Scialdone. Better yet, despite a rough couple of years, Memorial is back in the black.

During the financial-market meltdown, Memorial saw the interest rate on its debt climb from 4 percent to 14 percent. Combined with a loss in its investment portfolio, the system closed 2008 with a loss of nearly $32 million. But in 2009, it refinanced the debt and made small adjustments in its investments. It also restructured — paring 500 positions to cut its workforce to 3,400.

“We didn’t have massive layoffs,” Scialdone said. “But … we restructured some of the jobs, and when people left, we didn’t replace them. Some people lost their jobs, but it wasn’t a massive layoff.”

Its various moves allowed the hospital system to close 2009 with a $15.7 million profit. Its bottom line would have been even healthier were it not for a one-time refinancing expense of $22 million.

“2008 was an interesting year,” Scialdone said. “We were wondering if we were going to make it at the end of it. But historically Memorial has been very stable financially, and that year was a tough year for everyone.”

Operating on thin profits margins is normal for hospital systems, Steever said, so Memorial’s improved financial performance will only help influence a potential buyer’s decision.

Acquisitions

Even in a slack economy, hospital acquisitions are being made, according to industry analysts.

Small private hospital management companies like Vanguard Health Systems could be interested, as could large for-profit groups such as HCA, which is the largest in the country. Lifepoint, a publicly traded company, could also be interested.

Others, such as Tenent, one of the nation’s largest, are unlikely to be interested, at least at the moment.

“Tenent over-bought, expanded too quickly,” Steever said. “They were unable to pay their debt service on their acquisitions, so they’ve been divesting for the past five years.”

Denver-area systems, seeking to expand to the Colorado Springs market, also could be interested in the purchase.

“The ones already in the market — those are the ones that will be buying,” he said.

Memorial CEO Larry McEvoy agrees that players in the healthcare market will be interested in the hospital system.

And that shows we have something valuable,” he said. “We would be wise to take that value and create something for valuable.”

Scialdone, for one, favors a locally owned, locally controlled system.

As the former chief financial officer at Penrose-St. Francis Health Services and an 18-year employee at HCA, Scialdone said he’s seen how the larger systems run things.

“The control is here, locally,” he said. “We respond locally. One hundred percent of the profits go back into the system, to provide health care. In a larger system, the profits go up, and get spread out among many hospitals. Someone else is making the decisions.”

Scialdone also noted the city’s coffers won’t see a huge bump from Memorial’s sale.

Under the Colorado Hospital Transfer Act, any proceeds from the sale must go to “a like charitable activity.”

“And remember, it’s a one-time thing,” he said.

Financials

2009

Net revenues $542.6 million

Net income $15.7 million

2008

Net revenues $557.7 million

Net income $31.9 million

2007

Net revenues $518.7 million

Net income $18.5 million

2006

Net revenues $441.6 million

Net income $18.5 million

About Memorial

  • Founded in 1904 with 30 beds, the hospital was acquired by the city in 1942 for $76,500.
  • Includes three acute-care hospitals on two campuses, 12 facilities and 671 licensed beds.
  • Employs 4,100 employees, making it the largest private provider of jobs in Colorado Springs.
  • Holds 60 percent of the market.
  • Has the busiest emergency department in the state.
  • 29,713 admission in 2009