Reprinted from the January 5, 1995 issue of MODERN HEALTHCARE
Copyright, Crain Communications Inc., 740 Rush, Chicago, IL 60611 All rights reserved.
By Sandy Lutz
 Not-for-profit keeps clout in ND deal
 ND Deal
Dakota Hospital (above) joined Heartland Medical Center (right).
Two Fargo, N.D., hospitals resolved their ownership differences and merged last month in a deal that gives unusual protection to a not-for-profit hospital partnering with a for-profit chain.

Joining are Heartland Medical Center, owned by for-profit Champion Healthcare Corp. of Houston, and not-for-profit Dakota Hospital.

Their new for-profit Dakota Heartland Health System controls 284 of the 662 private staffed beds in Fargo. The city’s other private hospital is 378-bed MeritCare Hospital.

Consolidations
“Everybody’s talking about 50-50 joint ventures, but this is the first one we’ve really seen” between a for-profit and a not-for-profit, said Joshua Nemzoff, principal in charge of mergers and acquisitions in the Nashville, Tenn., office of Ponder & Co.

Nemzoff, who advised Dakota in the negotiations, said most for-profit chains that partner with not-for-profit hospitals retain control, either through equity or contracts in which the for-profit company’s management can’t be fired by the board. Frequently, the deals are structured as partnerships in which the for-profit chains are general partners.

But the Fargo deal contains safeguards designed to preserve the community assets of Dakota.

Because Dakota was the larger hospital, Champion contributed $20 million to match Dakota’s asset investment.

Also, Dakota appoints six members to the system’s 12-member board. Champion appoints three, and the nine appointees fill the three remaining seats.

That differs from others deals in which the not-for-profit and the for-profit appoint an equal number of board members. Typically, for-profit appointees vote as a block.
Champion has a contract to manage the system, but its fee is just $1 a year, and the board can fire the chief executive officer or the chief financial officer.

“We feel pretty good about it,” Harry Hawken, Dakota’s chairman, said about the hospital’s share of control.

Dakota also has a “one-way put” option. In 18 months, it can require Champion to buy its half of the facility. The price would be based on a total system value of 5.5 times earnings before depreciation, interest and taxes. That calculation, called EBDIT, is frequently used to value hospitals.

Champion, however, cannot require Dakota to buy it out under those terms, Hawken said.