Acute Care Industry Review


Reprinted from the May 13, 1996 issue of MODERN HEALTHCARE
Copyright, Crain Communications Inc., 740 Rush, Chicago, IL 60611 All rights reserved
By David Burda
Hospital attracts parade of bidders

Maybe Jackie O. had her tonsils taken out in Cookeville.

That’s how high the initial offers were for Cookeville (Tenn.) General Hospital. Despite community opposition, the city-owned facility is up for sale or lease to the highest bidder.

And the offers likely will go higher following the city’s surprise decision to reject all the bids and ask the suitors to resubmit their offers.

Like the recent multimillion-dollar auction of memorabilia owned by the Kennedy family of Massachusetts, the value of everyday things like a set of golf clubs or a 157-bed community hospital is the eye of the beholder.

And the bidders that want Cookeville General were willing to go as high as $100 million in cash for a hospital that generated just $37 million in total net revenues in 1994, according to the latest available data from the Tennessee health department. That year, the hospital posted a 5.6% profit margin with about $2.1 million in net earnings.

The value of the hospital has little to do with its actual value in terms of assets and revenues, said Josh Nemzoff, a Nashville, Tenn.-based consultant who’s been retained by the city of Cookeville to handle the bidding process. He said the high bids are being driven by intangible elements that make the hospital worth far more than its value on paper. Those intangible elements include:

-  Large not-for-profit hospital systems with tertiary hubs in larger Tennessee cities that are looking for patient referrals.

-  For-profit chains that are looking to add to their regional networks for contracting purposes.

- Those that see an untapped potential in Cookeville General and want to expand the facility and enjoy the subsequent surge in revenues.

In addition to being profitable, the hospital is strategically located midway between Nashville and Knoxville along Interstate 40, which connects central Tennessee with the eastern half of the state.

Four months after the Cookeville City Council voted 3-2 to solicit bids for the sale of the hospital, the sealed offers recently were opened, revealing how those intangibles affected the value of the hospital. The city received 12 bids, ranging from $39 million to $100 million (See chart).

Community Health Systems, a Brentwood, Tenn.-based for-profit chain, was the highest bidder. Nashville, Tenn.-based Columbia/HCA Healthcare Corp., the nation’s largest for-profit chain, came in fourth, with a bid of $68.5 million.

 The city also received two noncash offers: one a contract management deal and the other an affiliation arrangement.

Eight of the 12 bidders were for-profit companies. Four bidders were not-for-profit corporations or companies owned by not-for-profits.

But, based on Nemzoff’s recommendation, the city council on May 2 voted 3-2 to reject all the offers and ask the 12 bidders to resubmit proposals.

Nemzoff said the rebidding process likely will result in higher offers for Cookeville General.

Nemzoff said his recommendation to rebid wasn’t financially motivated. He said his compensation arrangement with the city is based on a fixed-fee deal, not on a percentage of the final sales price. He said he gets paid the same amount whether the city sells, leases or keeps the hospital.

Rather, the decision to reopen the bidding process was caused by the wide variations in the initial offers. Nemzoff said the bids were all across the board and were difficult to compare.

Melahn Finely, a hospital spokeswoman, said the city sent a revised request-for-proposal to the 12 bidders on May 2. Any new bids are due by May 12, and they’ll be opened at a May 16 meeting of the City Council, she said.

Tyree Wilburn, Community Health’s senior vice president and chief development officer, said the company is “certainly disappointed” with the city’s decision to reopen the bids. He said Community Health will submit another bid but didn’t know if it would exceed the company’s original $100 million offer because the second RFP contains different sale or lease criteria.

Nemzoff said the new RFP asks for sales or lease proposals only. Therefore, some of the 12 with contract management or affiliation offers likely will drop out of the competition, he said.

Meanwhile, on a parallel track, community residents who oppose a sale or lease of the hospital to an outside company still are working to thwart a deal.

The city solicited bids for the hospital despite opposition from the hospital’s administration and board. That opposition peaked in March, when residents in a local referendum overwhelmingly approved an amendment to the city charter requiring a voter approval of a sale (March 18, p. 8). The residents had pursued and obtained special state legislation authorizing the referendum.

However, the hospital referendum didn’t contemplate a lease arrangement, which the city subsequently decided was an option. The city’s pursuit of a lease has sent those opposed to a transfer of local control of the hospital back to the state Legislature for help.

Lawmakers passed a bill that would authorize a second referendum, this one giving residents the right to vote on a lease deal for the hospital. At deadline, the bill was awaiting Gov. Don Sundquist’s signature.

Assuming the governor signs the bill, a referendum on a lease likely won’t take place until the fall, which may come too late to block the city from leasing Cookeville General to an outside company.

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