Slow growth benefits company

Sunday, August 27, 2006 Other companies have tried to grow quickly and have been forced to cut back. By DON SHILLING VINDICATOR BUSINESS EDITOR The company proposing to take over Forum Health has been growing slowly for many years, avoiding the pitfalls of fast growth. Community Health Systems is one of the two most successful large hospital chains, said Sandy Steever, editor of a Connecticut-based newsletter that tracks the hospital acquisition market. The Tennessee-based company has been adding several hospital systems each year, which is a slow enough pace for it to manage, Steever said. The company has been working at this pace since at least 1993, when Steever began tracking the industry. Slow growth is necessary because management needs time to understand the new operation and how it can be improved, Steever said. Community Health was formed in 1985 and now operates or owns 76 hospital systems in 22 states. Forum Health, which has been struggling financially this year, has signed a nonbinding letter of intent to sell its assets to Community Health at an undisclosed price. Community Health's Web site said it plans to acquire two to four systems a year. Last year, it announced seven acquisitions, which was the most of any hospital acquisition company. Steever said he didn't see this as a departure from Community Health's slow-growth philosophy and said that perhaps company officials felt they had to move more quickly to take advantage of opportunities. Community Health's largest acquisition came in 2002 when it bought seven community hospitals from a system based in Memphis, Tenn. Grew too fast Steever said other hospital acquisition companies have tried to grow much faster but failed. HCA, formerly Hospital Corp. of America, grew to about 350 systems in the 1990s but ran into financial trouble. Steever said the company was growing for growth's sake instead of closely examining its acquisition targets. "Some of it may have been ego driven," he said. HCA, also Tennessee based, is now half its former size and is in the process of being acquired by an investors group. Tenet Health Care Corp. was another acquisition company that grew too fast in the 1990s, Steever said. The Dallas-based company also is half of its former size as financial difficulties forced it to sell off assets. In contrast, Community Health and another successful acquirer — Health Management Associates — have skilled acquisition teams that have been successful in identifying hospitals that will add to profits. A large number of hospitals have been for sale in recent years because of the complexity and cost of running a medical system, Steever said. Smaller systems, especially those that are municipally owned, haven't had the money to invest in expensive medical technology and new buildings, he said. Plus, systems today must be efficient, which is hard to accomplish when management is dealing with insurers, regulators, vendors, doctors, staff and patients, he said. Community Health has succeeded mostly by identifying systems in rural areas and small towns that haven't invested enough in their facilities and are losing patients to medical centers in larger towns, he said. By adding services and making improvements to the small-town system, Community Health has been able to keep those patients from leaving town, he said. That part of Community Health's mission fits with its intention to take over Forum. Local hospital systems for years have run marketing campaigns trying to keep local residents from going to Pittsburgh and Cleveland for medical care. Don't fit Other parts of the Mahoning Valley's identity don't fit with Community Health's stated mission. The company's Web site said it is looking for systems in areas with populations of between 20,000 and 200,000. The combined population of Mahoning and Trumbull counties is about 460,000. Community Health said it looks for areas with stable or growing population counts, but the Mahoning Valley has been losing population. Community Health said it likes systems that are the sole or primary provider of health care in an area and don't have a competitor within 25 miles. Forum faces competition from Humility of Mary Health Partners in both Youngstown and Warren and from hospital systems in Sharon and New Castle, Pa. "This deal looks like something of an experiment for them," Steever said. "I'm not sure what their rationale is." Perhaps, Community Health is getting the system at such a bargain price that it couldn't pass it up, he said. Rosemary Plorin, a spokeswoman for Community Health, could not be reached to comment for this story but said last week that the picture of the company buying in only nonurban, noncompetitive areas is no longer true. She said it has acquired several systems in highly competitive areas in Pennsylvania. Steever said Health Management Associates, the Florida-based company that also has been growing steadily, has bought some multihospital systems in urban areas recently and has been criticized by stock analysts as straying from its mission. That's a big reason why its stock price has been down, he said. The stock price rose from $19 a share to $26 in less than a year. But since May 2005, the stock has fallen back to about $20. Community Health's stock rose from $25 a share to $35 from late 2004 to early 2005 and since has been trading at between $35 and $40. shilling@vindy.com