Community Health Faces Deal Standoff With Doctors in Key Market

  • Physicians proposed $2.4 billion deal to take over the network
  • Hospital operator had earlier pushed for richer terms

A group of doctors offered this week to buy Community Health Systems Inc.’s crown jewel Lutheran Health Network in Fort Wayne, Indiana, for $2.4 billion, as the two sides seek to end a long-running feud, said people familiar with the matter.

The doctors made the offer May 15 and gave Community Health’s management a deadline of Monday, May 22, at noon to accept the deal. Community Health hasn’t responded directly to the offer. The physicians collectively own 20 percent of the Lutheran network. The company owns the remaining 80 percent.

The sides have been at odds since December, when several doctors and some employers whose health plans work with Community Health asked the hospital chain to sell its stake. At a meeting at the time, Community Health President Tim Hingtgen said that the company would divest Lutheran and later told the doctors that they would run a noncompetitive bid process, the people said.

Community Health didn’t immediately respond to a request for comment.

Price Pressure

In the months since, Tennessee-based Community sought a price of 12 times the network’s earnings before interest, taxes, depreciation and amortization, or Ebitda. The network brings in about $300 million a year in such profits, analysts have estimated. The doctors’ $2.4 billion offer is about 10.8 times Ebitda. The doctors’ bid is backed by a private-equity firm and another hospital chain, the people said.

The company would be forced to demand a high price for the Lutheran network because of the role it plays in Community Health’s overall profit structure, said John Morrow, an analyst with Franklin Trust Ratings.

“Someone would have to pay billions for it, because CHS needs to get billions for it,” he said in a telephone interview. “These are the hospitals that are carrying your profitability. If you sell this portion, the rest of it is useless.”

Aspects of the potential deal were reported this week by Modern Healthcare.

The doctors in Lutheran refer enough patients to account for 80 percent of the hospital’s revenue, Fort Wayne City Councilman John Crawford said in an interview. Crawford is also a physician and refers patients to Lutheran. He isn’t a member of the group of doctors who want to buy Community Health out.

Doctors and employers have complained that Community Health hasn’t invested enough and that Lutheran’s facilities are in decline, Crawford said. In the December meeting, the doctors said they had irreconcilable differences with Community, the people said.

“Community makes about $300 million in profit from Lutheran and it’s not being invested in the Fort Wayne community,” said Crawford, who added that more than 100 doctors attended a staff meeting this week and gave Community Health a vote of no confidence. “I’ve never seen that many doctors agree on anything.”

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