DealBook: Talk of Takeover Grows at Health Management Hospital Group

David Albers/Naples Daily NewsPhysicians Regional Medical Center in Naples, Fla., part of Health Management Associates, the third-largest for-profit chain.

Ever since the chief executive of Health Management Associates, the for-profit hospital system, abruptly announced nearly three weeks ago that he would be leaving to lead a religious mission in South America, speculation has mounted about whether the company could be headed for a takeover.

Its stock has soared 36 percent to a six-year high. Its largest shareholder appears eager to play a bigger role in determining the company’s next steps, even if that means taking on the board. And executives from the most likely potential buyer have — without naming names — indicated they could be in the market.

This week, H.M.A., which is based in Naples, Fla., said its board had hired financial advisers to help it consider strategic alternatives but also made clear it would not discuss its plans in any detail.

Pressure is intensifying on the company and its board, particularly its chairman, William J. Schoen, who is viewed by some analysts as less than enthusiastic about selling.

A former chief executive who has shaped and reshaped the company several times over the decades, Mr. Schoen, 77, has been chairman for 27 years.

“He’s certainly someone who’s played a very strong role in forming the company’s strategy,” said Darren Lehrich, an analyst at Deutsche Bank. “There could be some protecting-the-legacy issues there.”

H.M.A. is the nation’s third-largest for-profit hospital chain, by number of beds, with 71 locations. It has struggled in recent months with falling inpatient admissions to its hospitals.

While other hospitals also reported weaker financials in the first few months of this year, the company’s revenue may have also been hurt by an investigation by CBS’s “60 Minutes” that ran late last year, highlighting concern over whether patients were being unnecessarily admitted. In the report, several former employees said the company coerced doctors to admit patients to its hospitals, regardless of medical need, to increase company profits.

H.M.A. has denied the accusations, saying admissions are based solely on what is best for patient care.

Among the myriad government investigations and civil lawsuits that the company discloses in its regulatory filings, H.M.A. has also indicated that United States attorney’s offices in seven states were investigating its physician referrals, including financial arrangements and the “medical necessity of emergency room tests and patient admissions.”

The inquiry appears to be part of a broader look by federal regulators into whether some of the nation’s hospitals are pressing emergency physicians and others to admit patients who could be treated without having to stay overnight in the hospital.

H.M.A. said it was cooperating with regulators.

Some Wall Street analysts say those various investigations and lawsuits could turn off potential buyers.

“Buying H.M.A. means dealing with its troubled operations plus escalating risks from burgeoning legal issues that could prove prohibitively expensive,” Vicki Bryan, an analyst at the bond research firm Gimme Credit, wrote in a note to clients earlier this month.

Others note that since a wave of acquisitions several years ago by private equity, most of the deal activity among public hospital systems has been for single hospitals or smaller deals.

“There are a lot of smaller, not-for-profit hospitals that are looking for financial partners,” said Dean Diaz, a senior credit officer at the Moody’s Corporation. “There are a lot of potential targets out there that can be done without necessarily looking for a big transformational deal.”

A series of curious moves kindled the recent speculation around the company.

In early May, Glenview Capital Management, the hedge fund founded by Lawrence M. Robbins, signaled in a regulatory filing that it had increased its stake and now held more than 37 million shares, or 14.6 percent of H.M.A.’s outstanding shares. The filing allowed it to make direct recommendations to the board.

The company’s stock hardly budged on the news. But the filing drew a much sharper, defensive response from the board.

More than two weeks later, at a board meeting, the company adopted a so-called poison pill to thwart any hostile takeover by a large investor. The pill goes into effect if any investor tries to buy 15 percent or more of the company.

Within a few days Glenview issued a clarification that said it had no interest in acquiring the company.

Investors were then surprised in late May when the company announced that its chief executive, Gary D. Newsome, 55, would retire at the end of July to take over as president of the Uruguay-Montevideo Mission in South America.

Mr. Newsome, who became chief executive in 2008, earned nearly $22 million in total compensation over the last three years, according to regulatory filings. Mr. Newsome had been a senior executive at Community Health Systems, another for-profit hospital system.

Gary Newsome is leaving as C.E.O. of the hospital chain.

This week, Glenview raised the stakes when it asked the board to remove or change the poison pill in a way that would allow investors to acquire a bigger stake without activating it, according to the regulatory filing.

The letter added that Glenview was evaluating whether to formulate a proposal to make changes “to all or a portion” of the company’s board.

That’s an unusually aggressive and public stance for Mr. Robbins, who observers say prefers to exert his influence on companies in a more friendly, behind-the-scenes way.

Mr. Robbins has been eager for hospital stocks for more than a year, talking them up at a New York investor conference a year ago. Glenview owns stakes in several publicly traded for-profit hospital systems.

The list of potential buyers for H.M.A. isn’t long, with many pointing to Community Health as the most likely candidate.

Citing the company’s success in its $6.8 billion takeover of Triad Hospitals in 2007, an executive for Community Health told investors at a conference in late May that it was “open to doing that again.”

But the executive emphasized that any potential deal would have to be done on friendly terms. Community Health learned that lesson the hard way after its unsuccessful unsolicited bid for Tenet Healthcare in 2010 wound up in an ugly mix of lawsuits and accusations of fraud and wrongdoing between the two hospital systems.

Community Health has disclosed it is also under investigation by the Justice Department, which is seeking information “about our relationships with emergency department physicians, including financial arrangements.” Community said it was cooperating with government officials. The company declined to comment further on the investigation and its potential interest in H.M.A.

The question many are asking is whether H.M.A.’s directors, particularly Mr. Schoen, would welcome even a friendly bid.

In its statement on Wednesday, the board said it had engaged Morgan Stanley and Weil, Gotshal & Manges to consider “strategic alternatives and opportunities available to H.M.A.”

While Mr. Schoen has spurned efforts by others to acquire H.M.A. in recent years, he is certainly no stranger to deal-making. The chairman of a small bank in Naples that he had started, Mr. Schoen joined H.M.A.’s board in 1983. Less than two years later, after setting the company on its course of acquiring rural hospitals, he was named co-chief executive.

Later, in 1988, Mr. Schoen took H.M.A. private and then public again in 1991.

But a few years ago, in 2007, when H.M.A. engaged in serious discussions about a potential buyout with a group of private equity firms, Mr. Schoen thwarted their efforts. He engineered a deal in which the company borrowed $3.25 billion, loading the company up with debt, to pay shareholders $2.4 billion in dividends.

Hospital Billing Varies Wildly, U.S. Data Shows

In Saint Augustine, Fla., one hospital typically billed nearly $40,000 to remove a gallbladder using minimally invasive surgery, while one in Orange Park, Fla., charged $91,000.

In one hospital in Dallas, the average bill for treating simple pneumonia was $14,610, while another there charged over $38,000.

Data being released for the first time by the government on Wednesday shows that hospitals charge Medicare wildly differing amounts — sometimes 10 to 20 times what Medicare typically reimburses — for the same procedure, raising questions about how hospitals determine prices and why they differ so widely.

The data for 3,300 hospitals, released by the federal Centers for Medicare and Medicaid Services, shows wide variations not only regionally but among hospitals in the same area or city.

Government officials said that some of the variation might reflect the fact that some patients were sicker or required longer hospitalization.

Nonetheless, the data is likely to intensify a long debate over the methods that hospitals use to determine their charges.

Medicare does not actually pay the amount a hospital charges but instead uses a system of standardized payments to reimburse hospitals for treating specific conditions. Private insurers do not pay the full charge either, but negotiate payments with hospitals for specific treatments. Since many patients are covered by Medicare or have private insurance, they are not directly affected by what hospitals charge.

Experts say it is likely that the people who can afford it least — those with little or no insurance — are getting hit with extremely high hospitals bills that may bear little connection to the cost of treatment.

“If you’re uninsured, they’re going to ask you to pay,” said Gerard Anderson, the director of the Johns Hopkins Center for Hospital Finance and Management.

The debate over medical costs is growing louder, spurred partly by President Obama’s overhaul of the health insurance system.

Hospitals, in particular, have come under scrutiny for charges that are widely viewed as difficult to comprehend, even for experts. “Our goal is to make this information more transparent,” Jonathan Blum, the director of the agency’s Center for Medicare, said in an interview.

The data covers bills submitted from virtually every hospital in the country in 2011 for the 100 most common treatments and procedures performed in hospitals, like hip replacements, heart operations and gallbladder removal.

The hospitals were not given the data before its release by Medicare officials.

Some hospitals contacted Tuesday said that the higher bills they sent to Medicare reflected the fact that they were either teaching hospitals or they had treated sicker patients.

For example, billing records showed that Keck Hospital of the University of Southern California charged, on average, $123,885, for a major artificial joint replacement, six times the average amount that Medicare reimbursed for the procedure and a rate significantly higher than the average for other Los Angeles area hospitals.

“Academic medical centers have a higher cost structure, and higher acuity patients who suffer from many health complications,” the hospital said.

The hospital added that it wrote off any difference between what it charged and what Medicare paid, rather than seeking to collect it from patients. Centinela Hospital Medical Center, also in Los Angeles and owned by Prime Healthcare Services, charged $220,881 for the same procedure.

A spokesman said the hospital served a sicker and older patient base.

The data showing the range of hospital bills does not explain why one hospital charges significantly more for a procedure than another one. And Medicare does pay slightly higher treatment rates to certain hospitals — like teaching facilities or hospitals in areas with high labor costs.

Mr. Blum, the Medicare official, said he would have anticipated variations of two- to threefold at the most in the difference between what hospitals charge.

However, hospitals submitted bills to Medicare that were, on average, about three to five times what the agency typically pays to treat a condition, an analysis of the data by The New York Times indicates. And variations between what hospitals charge may be even greater.

Mr. Blum said he could not explain the reasons for that large difference.

An official at the American Hospital Association, a trade group, said there was a cat-and-mouse game between hospitals and insurers that affects what hospitals charge.

This article has been revised to reflect the following correction:

Correction: May 9, 2013

An article on Wednesday about hospitals’ widely varying billings for the same procedures misstated part of the name of the federal agency that released the billing data. It is the Centers for Medicare and Medicaid Services (not the Center).

SMU Law Professor Teaches From Hospital Bed While Battling Leukemia

Sarah Tran with her daughter
Image: Josh Geller

Sarah Tran was determined to continue teaching property law in the fall of 2012, despite a 28-day hospital stay for the treatment of leukemia.

"I was diagnosed with acute leukemia on October 13," says Tran, an assistant law professor at Southern Methodist University Dedman School of Law in Dallas. "Actually, it was my second time getting it," she says.

She had undergone a bone marrow transplant from a brother four years earlier, but she learned during the fall semester that the disease had returned.

"I felt like the students had been planning to take my exam and should be able to rely on a certain style of teaching," Tran says. "I felt like I couldn't abandon them."

So on Wednesdays and Fridays, from 1:00 to 2:20 p.m., a sign on her hospital room door at Baylor University Medical Center at Dallas asked those entering to be quiet while she conducted class for 80 first-year students via Skype.

"Sometimes, a machine I was hooked up to would start beeping, but they [medical staff] knew not to talk to me while they fixed it," she says.

Her husband brought her a suit jacket that she would wear over hospital clothes.

"I pretended like I was wearing a suit," she says.

As she began to lose hair, a typical side effect of chemotherapy treatment, Tran says she kept changing her look.

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