Vital Signs for Asante

Asante's proposed takeover of Ashland Community Hospital is as important to the Medford health care provider's future as it is to the much smaller institution's survival.

In one fell swoop, Asante Health System would assure one less competitor in the Rogue Valley and increase its customer base in an age when health care organizations are feverishly looking for ways to expand — or face implosion beneath the weight of the new Affordable Care Act's demands.

Asante wasn't ACH's first choice when the financially troubled hospital looked to sell itself.

But when San Francisco Bay Area-based Dignity Health, the fifth-largest hospital system in the country, backed out of negotiations with ACH in October, Asante and its mounting reserves looked better and better to an organization that was hemorrhaging at a rate of $3.3 million last fiscal year. ACH and Asante entered negotiations in November and are expected to announce an agreement early this year.

Asante produced $517 million in revenue during fiscal 2012 from its Rogue Regional Medical Center in Medford, Three Rivers Medical Center in Grants Pass and a widespread group of allied operations. In the year ending Sept. 30, its net assets — what the entire operation was worth — grew nearly 24 percent, to $476.9 million.

ACH, however, experienced declining revenue and dissipating reserves over the past few years, according to its financial filings. Mark Marchetti, ACH chief executive officer, has said the hospital could be closed in a year if it remains independent. Former ACH board Chairman Doug Diehl told the Ashland City Council on Oct. 16 that ACH had just four to six months' worth of operating cash.

Asante's acquisition of ACH isn't so much about tidying up an unstable neighboring hospital as it is positioning Asante's future in a brave new world where the number of "covered lives" — patients — and tracking their individual health becomes paramount for every health care provider, thanks to the sweeping reforms under the Affordable Care Act.

The act, whose full name is Patient Protection and Affordable Care Act, was signed by President Barack Obama on March 23, 2010. The law aims to expand health care coverage to an estimated 32 million Americans by 2019.

Provisions of the act could potentially change not only how Americans receive care, but how health care providers are paid for care.

"Right now, the catalyst for consolidating activity and mergers and acquisitions is the Affordable Care Act," said George Pillari, a managing director with Alvarez & Marsal, the firm that handled Harry & David's turnaround operation, and a keen observer of upheavals in the health care industry.

Hospitals will no longer be reimbursed per service provided, he said, "but on the basis of the overall health of the population they treat."

Payment could be withheld, for example, if a patient returns to the same provider to be treated again for the same problem within a short time period.

"Essentially hospitals are going to absorb more and more of the financial risk of care," Pillari said. "Hospitals will become hybrids of hospital and insurance companies. One of the keys is whether there will be a big enough risk pool to spread things out. So size matters."

When a seller is highly motivated, as is ACH, terms for consolidation are more advantageous, but that doesn't guarantee smooth sailing — especially for the smaller hospital.

"A larger system adding on a smaller hospital is presumably going to anticipate some cost savings, reducing overhead at the acquired hospital, whether it's personnel or IT (information technology) systems — things that are positioned, quite frankly, to be combined and operating as one system," said Jim Riley, a partner in the health care group of McGuire Woods LLP, an international law firm based in Chicago.

The increased market share provides benefits for both parties, particularly when dealing with insurance companies.

"You can create some leverage in terms of negotiations with suppliers and third-party payers," Riley said.

Terms of an Asante buyout of ACH have not yet been made public.

While the shareholders of for-profit companies can be attracted to takeovers by premium offerings above the stock's current value, Asante, as a not-for-profit company, can't be simply scooped up by a larger firm and bought out at a premium price by an expanding health care corporation, said Roy Vinyard, Asante's chief executive officer.

"We're not a takeover target, in the sense we have the ability to decide our own fate, who we affiliate with or don't affiliate with," Vinyard said.

Asante's revenue stream, patient count, market share and bond ratings have remained steady. Although some of its investments have taken a hit at times, it hasn't undermined Asante's overall strength.

Fiscal 2012 was the second time the organization surpassed the half-billion dollar revenue mark after reeling in a little less than $501.8 million in 2011 and $482.4 million in 2010. Asante's net assets of $476.9 million in 2012 were up from $385.1 million in 2011 and $363.6 million in 2010, according to Electronic Municipal Market Access data.

Whether Asante plays a continuing role in the merger and acquisition theater in the years ahead, or simply hunkers down and finesses its way forward, will largely depend on how it assesses its own needs.

"There are economies of scale you get with size, and that will certainly be a factor up to a point," Vinyard said.

"But bigger is not always an absolute better; it often depends on how you utilize the economies of scale. I feel our system is appropriately sized, taking advantage of as many efficiencies as possible. At this point I don't see Asante becoming part of a larger system. I can't foresee us being sold or taken over by a larger organization."

Asante's financial strength, hence its independence, has stemmed from its operational revenue streams — surgeries, shots, X-rays, hospital stays. At times, money management has proven tougher, primarily because safe investment options haven't produced the mounds of money they might in a high-interest-rate environment.

The organization earned almost $22.8 million from its investments in fiscal 2012, after losing nearly $22.5 million in 2011 and earning nearly $21.3 million in 2010, Vinyard said.

The debt Asante will incur from the acquisition of ACH largely can be erased by economies of scale and reduced overhead, as many administrative costs will be absorbed into Asante's existing corporate structure, analysts say.

Asante's longtime rival, Providence Medford Medical Center, has a smaller market share than Asante but far greater resources through its parent system, the five-state Providence Health and Services. While other multi-state operators might find Asante attractive, Providence's size would likely preclude it from being a takeover target.

Asante's pending acquisition of ACH is a microcosm of what's going across the country, analysts say. Becker's Hospital Review has detailed more than 80 mergers and acquisitions in the past three months.

"My guess is every hospital in the country is having discussions about 'what would we do if someone approaches us to acquire us or we're approached by smaller entities,' " said Dennis Stillman, a senior lecturer at the University of Washington, who works as an interim chief financial officer for hospitals.

"For years, no one paid much attention," Stillman said. "Today everyone is thinking about what we do in this new market."

Doctors and hospitals will have to consult costly databanks and software tools to prove quality of care under the Affordable Care Act and pay people to maintain those databanks.

"Independent health care systems such as Asante or St. Charles Medical Center (in Bend) may not be big enough to take on the risks associated with the new payment schemes," said Knute Buehler, an orthopedic surgeon in Bend. "Across the industry, we're seeing pressure toward consolidation.

"The clinical analytics to review best practices and quality outcomes takes a sophistication and expensive analysis to process, and that requires a fair amount of infrastructure," Buehler said. "In general, across the industry, you will see a lot of conversation and hand-wringing."

There are other well-known, but new to health care, players emerging as well, ready to siphon off dollars.

Around the country, Walmart and Walgreens are gearing up to offer heath care coverage and treatment. Industry analysts even predict those firms could make inroads similar to what they did in retailing.

Vinyard, however, doesn't consider national chain health care a present threat.

"I don't think it would impact Asante much if Walmart or Walgreens began offering health care plans, except it might mean that we have additional contracts to provide services with another health plan," he said. "Physicians would also have contracts — or not — with the additional plans."

An often-raised concern in Ashland when suitors were sized up was whether ACH would continue to function if the new owner fell into hard times.

If a larger entity were to swallow up Asante, would it feel obligated to maintain Ashland's 24-hour care facility only a dozen miles from Rogue Regional Medical Center in Medford?

"That was certainly one of my primary concerns," said Russ Silbiger, who recently left the Ashland City Council. "For me, that was the big question, and I was certainly not alone. (Asante) is small enough that it would be an acquisition target, but on the other hand, Asante's leadership wants to lead a system and doesn't want to sell out to another system. As long as it remains strong financially, it doesn't seem to be in their interest to do that."

Such long-term implications are generally addressed during the due diligence processes leading to acquisitions, said Riley, the Chicago-based lawyer.

"The Ashland people are assuming Asante has done their homework in talking to bond holders, underwriters or rating agencies in order that this transaction will not significantly impact them and hopefully be positive," Riley said.

Although the final structure of the ACH acquisition hasn't been announced, there are ways Asante can protect its new turf by creating a separate subsidiary for ACH, said Alvarez & Marsal's Pillari.

"If (Asante) were then to encounter a real severe financial situation — insolvency or bankruptcy — it wouldn't shut down the entire system," Pillari said.

Any sale of ACH will have to first be approved by Ashland City Council, as the property, buildings, improvements and fixed equipment are owned by the city.

"It's a good move for Asante because it solidifies its position and it will have a fairly large percentage of the market share in the valley," Silbiger said. "That in itself gives you a business edge in the marketplace — like having all the car dealerships."

Reach reporter Greg Stiles at 541-776-4463 or Follow him on Twitter @GregMTBusiness, and read his blog at Edge.

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