Community Health Systems, Inc.

views updated

Community Health Systems, Inc.

155 Franklin Road, Suite 400
Brentwood, Tennessee 37027
U.S.A.
Telephone: (615) 373-9600
Fax: (615) 371-1068
Web site: http://www.chs.net

Public Company
Incorporated: 1985
Employees: 31,100
Sales: $3.33 billion (2004)
Stock Exchanges: New York
Ticker Symbol: CYH
NAIC: 622110 General Medical and Surgical Hospitals

Community Health Systems, Inc. is the largest non-urban provider of healthcare services in the United States, operating more hospitals than any competitor. Community Health owns or leases more than 70 hospitals in a 22-state territory, operating nearly 8,000 licensed beds. In approximately 85 percent of its markets, the company is the sole provider of general hospital services. Community Health acquires rural hospitals that typically operate on a nonprofit basis and are struggling financially. The company invests in its acquired hospitals, expanding services and improving managerial controls to produce profitable hospitals.

Origins

Community Health grew in fits and starts during its first decade, a decade in which two of its founders, Richard Ragsdales and E. Thomas Chaney, assumed an active role in running the company. The company they helped found in 1985 grew to be the biggest of its kind, but much of the company's growth was achieved after they departed. Their business strategy was sound, however, forming a foundation that could be leveraged into creating the more than $3 billion-in-sales company that Community Health became 20 years after the pair acquired their first hospital.

When Community Health began operating in 1985, Ragsdales served as the company's chairman and Chaney served as its chief executive officer. The first hospital to come under their control was the Fannin Regional Hospital in Blue Ridge, Georgia. The hospital, acquired in January 1986, contained 34 licensed beds, the fewest number of beds acquired by the company during its first 20 years in business. The acquisition was followed by the purchase of two more hospitals, both acquired in September 1986. Community Health purchased the Highland Medical Center, a 123-bed hospital in Lubbock, Texas, and the Russell County Medical Center, a 78-bed hospital located in Lebanon, Virginia.

Community Health's first trio of hospitals provided a blueprint for expansion. The company set its sights on acute-care hospitals operating in rural communities, focusing on towns with populations ranging between 20,000 and 80,000. Suitable acquisition candidates generally were operated as nonprofit hospitals and typically were suffering from financial problems. Community Health, which operated as a publicly traded, for-profit, enterprise, served as a savior of sorts for troubled, rural hospitals, although the company, to be sure, was driven by the need to make money. For Ragsdales, Chaney, and their successors, Community Health's strategy allowed them to lay claim to pursuing both missions: serving the public good and focusing on generating profits.

According to U.S. Census Bureau figures, one-quarter of the country's population lived in rural communities during Community Health's formative decades. These communities were served by hospitals spread far apart, often making a particular community dependent on a single hospital for providing healthcare. Community Health focused its acquisitive efforts on communities in which it would become the sole provider of general hospital services, targeting hospitals that were located more than 25 miles from a competing hospital. The acquisition strategy left Community Health free from any meaningful competitive pressures and it also aided the community the hospital served. The financial well-being of an isolated hospital, obviously, was integral to the health of the community it served, but the continued existence of the hospital delivered another benefit to the community, serving as one of its primary employers. There was resistance to the idea of a corporation taking over control of nonprofit hospitals in certain areas of the country—in the Northeast, for example—but typically communities welcomed the arrival of Community Health, whose intervention rescued financially failing hospitals and often led to an improved level of healthcare.

Community Health, in essence, was in the corporate turnaround business, no different than a corporation buying an ill-managed local manufacturer, improving its management, and gaining a substantially more valuable manufacturing business through its efforts. Community Health made capital improvements in the hospitals it acquired and it expanded the services offered by the hospitals, investing in more sophisticated emergency rooms, adding physical rehabilitation centers, and adding capabilities such as laser surgery. The company also recruited doctors, frequently a difficult task in the more remote areas of the country, attracting young physicians by offering subsidized office space and other incentives. These changes, combined with the standardization of tasks such as accounting—all presided over from a central office—produced better, more profitable hospitals, according to Community Health's strategy. By following its strategy, Community Health had acquired 13 hospitals in small towns across the Sunbelt by its fifth year of business, succeeding, according to the December 2, 1991 issue of Forbes, in "turning marginal outfits into big moneymakers." Revenues by the end of 1991 reached $138 million, from which the company gleaned $9.3 million in profits.

The revenue total recorded by Community Health at the beginning of the 1990s represented only a fraction of the total the company boasted at the decade's conclusion. Although the financial growth was driven by several factors, the 1990s provided ideal conditions for Community Health's acquisition strategy. During the decade, more than 450 community hospitals, most nonprofits, went out of business, tempering the resistance of for-profit companies coming in to salvage nonprofit hospitals. Chaney, who was in charge of the day-to-day management of the company, made his most aggressive move during this period, completing the acquisition of Atlanta-based Hallmark Healthcare in 1994. The acquisition nearly doubled the size of Community Health, giving the company 18 hospitals.

New Owners in the Mid-1990s

Roughly a year after the Hallmark acquisition was completed, a leadership dilemma led to dramatic changes at the company's Brentwood, Tennessee, headquarters. At the end of 1995, Chaney announced he no longer wanted to lead the company, giving Community Health's board of directors a deadline for his departure that left the governing body scrambling for a replacement. The company's board, reportedly, believed they could not find a replacement for Chaney by the date of his intended departure, which prompted the directors to put the company up for sale. In March 1996, the New York-based investment banking firm Merrill Lynch was hired to solicit interest in the company. After talking to 20 interested buyers, Merrill Lynch found a suitable buyer, a New York-based private investment firm named Forstmann Little & Co.

Forstmann Little was led by Theodore Forstmann, a leveraged buyout specialist who gained fame during the 1980s by decrying the use of junk-bond financing. Forstmann's firm, which had more than $20 billion invested in 20 companies, made its living by acquiring companies and selling them for a profit. In 1990, for instance, the company paid $850 million for Gulfstream Aerospace Corp. and sold the company six years later for $4 billion. In 1994, Forstmann Little paid $1.4 billion for Ziff-Davis Publishing and sold it the following year for $2.1 billion.

Forstmann Little acquired Community Health in 1996, marking the firm's first purchase of a healthcare company. The firm paid $1 billion for Community Health, which at the time operated 38 hospitals in 18 states. The change in ownership made Community Health a privately held company and it led to the appointment of a new leader for the company. In January 1997, Wayne T. Smith was named president of Community Health and selected as its chief executive officer in April 1997. Smith joined Community Health after spending more than two decades working for Louisville, Kentucky-based Humana Inc., joining the healthcare provider in 1973 after serving a four-year stint as a Captain in the U.S. Army Medical Services Corp. Smith rose through the executive ranks at Humana, becoming its president and chief operating officer in 1993.

Company Perspectives:

Non-urban hospitals are vital to keeping quality health care close to home. We understand the specific needs of hometown hospitals—and we work with the community to create a partnership that maintains local involvement while providing the necessary resources to expand services, recruit physicians and enhance technology. Many independent hospitals are finding it beneficial to partner with CHS for economies of scale, volume purchasing agreements, management expertise and better access to capital. Every CHS hospital operates with a local governing board. Each community served by CHS is different. Through a collaborative effort between the community and CHS, we help hometown hospitals achieve or maintain their position as the dominant health care provider of choice in their marketplaces.

Under Smith's leadership, Community Health began expanding its portfolio of properties, becoming the largest operator of rural hospitals in the country. The company's acquisition campaign began in earnest in 1998, when Community Health acquired five hospitals for $188 million. By mid-1999, the company had acquired two more hospitals, giving it a total of 45 hospitals, and had signed letters of intent to acquire five more hospitals. The company, during this period, was enjoying its status as a privately held company, enabling it to quietly develop into the country's largest player. "We haven't really tried to talk too much about what we're doing or how we're doing it," Smith said in an August 16, 1999 interview with Modern Healthcare. "We've just been doing it," he added, "and we're getting good results." Converting to public ownership was inevitable, however, primarily because Forstmann Little wanted to get a return on its investment and secondly because Smith needed to obtain capital to fuel the company's expansion drive. "Our reason for going public again would be to access the public market in terms of dollars for capital," Smith explained in his interview with Modern Healthcare. "Whenever the hospital sector improves, we'll be looking for an opportunity to go public and access the capital markets."

Going Public in 2000

Less than a year after Smith hinted at an initial public offering (IPO) of stock, Community Health returned to the ranks of publicly held companies. When investors were offered the opportunity to acquire a stake in the company, they became financially wed to what rapidly was becoming an industry giant. Revenue in 1998 exceeded $850 million, eclipsing the $1 billion mark the following year. In June 2000, the company completed its IPO, raising $245 million from the offering and gaining another $269 million through a secondary offering of stock completed before the end of the year. By the end of 2000, the company's first profitable year since 1995, sales increased 24 percent, reaching $1.34 billion.

Once Community Health entered the public spotlight, it was exposed to greater scrutiny from industry analysts, a target for criticism and praise alike. The appraisal from the pundits was positive, underscoring the soundness of the company's strategy. Community Health adhered to a disciplined acquisition strategy, selecting hospitals that were ailing for reasons that were not related to the market they served. "You can fix bad hospitals; you can't fix bad markets," an analyst noted in the June 24, 2002 issue of Investor's Business Daily. Community Health relied on strong management and a centralized office to keep costs down, recouping the investments it made in recruiting health specialists, adding new services, and implementing new information and supply systems by carefully following its acquisition criteria. Once a hospital was purchased, it often took several years for the hospital to reach Community Health's standard of optimal performance—one of the reasons the company was unprofitable during the late 1990s—but after the property's financial performance improved, Community Health gained a valuable money-maker.

As Community Health neared its 20th anniversary, the company held sway as the leader in the rural hospital field. Forstmann Little, which first sold a portion of its stake in the company after its IPO, reduced its stake in the company three times after the IPO. In September 2004, the investment firm sold its remaining 23 percent interest for $560 million, which, combined with the earlier stock sales, nearly tripled the firm's original investment. Theodore Forstmann's first foray into the healthcare sector met with success; for Community Health, the backing of Forstmann's firm spurred the company's growth, making the intervention of new owners a beneficial relationship. Between 1996 and 2004, the company spent $1.8 billion, acquiring 47 hospitals during the period. In the years ahead, the company seemed likely to retain its leadership position as it continued its expansion. Preparing to guide the company forward, Smith estimated there were 375 rural hospitals in the country that met his buying criteria, giving Community Health ample room for growth as it sought to widen its lead over competitors in the years ahead.

Principal Subsidiaries

CHS/Community Health Systems, Inc. Community Health systems Professional Services Corporation; Community Insurance Group, Ltd. (Cayman Islands); Pennsylvania Hospital Company, LLC; Virginia Hospital Company, LLC; Community Health Investment Corporation; CHS Holdings Corp.; Hallmark Healthcare Corporation; Hallmark Holdings Corp.

Principal Competitors

HCA Inc.; Health Management Associates, Inc.; Triad Hospitals, Inc.; Lifepoint Hospitals Inc.; Province Health Care Co.

Key Dates:

1985:: Community Health is founded.
1994:: The acquisition of Hallmark Healthcare nearly doubles the size of Community Health.
1995:: E. Thomas Chaney announces his intention to resign as chief executive officer.
1996:: Community Health is acquired by Forstmann Little & Co.
1997:: Wayne T. Smith is named president and chief executive officer of Community Health.
2000:: Community Health completes its initial public offering of stock.
2004:: Forstmann Little divests its remaining stake in Community Health.