The deal is a byproduct of excess private equity funds sitting around and the stresses piling up on public health care companies — and “quarter-to-quarter obsessions aren’t ideal for turning the battleship.”


LifePoint Health’s deal to go private in a $5.6 billion deal with Apollo Global Management underscores the heft of action the company will need in the coming years to steer its rural hospital portfolio through a storm of headwinds.

LifePoint is described by Morningstar’s Jake Strole “as likely the best house on a bad block.” It has performed well in challenging environments compared to other rural hospital operators, analysts said, but recalibrating for the next era of care delivery could have put public shareholders on edge.

The glare of quarterly reporting keeps companies on a tight cycle with little room for experimentation or transformation before investors get antsy for results.

“Health care companies, particularly incumbents, aren’t ideal candidates for being public companies right now because they are going through a lot of change. They have to adjust their business models. They have to adjust their cost structures — and Wall Street isn’t patient with that,” said Emily Evans, managing director with Hedgeye Risk Management.

In a note to employees disclosed in a U.S. Securities and Exchange Commission filing, LifePoint CEO Bill Carpenter wrote “we believe this transaction will allow us to meaningfully extend our mission and ensure that non-urban communities across the country have access to quality care, while generating new opportunities for growth and partnerships. This will help us navigate the changing healthcare industry dynamics.”

LifePoint and the company it will absorb, RCCH HealthCare Partners, both operate in rural areas where the population is shrinking and aging, and where economic growth, or even stability, is far from guaranteed. Patients are traveling to larger metro areas for specialized services, making it harder to keep enough patient flow to attract specialists who are already in demand.

“We are eager to explore new opportunities that will help us develop what the future of non-urban healthcare looks like in America, alongside RCCH and Apollo,” Carpenter said in the letter.

Calls to LifePoint headquarters in Brentwood requesting comment or an interview were not returned. LifePoint’s board could bring in a new suitor until Aug. 22 when the “no-shop” period begins yet terminating the merger agreement could cost up to $80.3 million, according to the definitive merger agreement filed with SEC. In the event RCCH fails to finalize the merger then it’s contracted to pay LifePoint $160.7 million.

Rural concentration raises questions about how the company will weather a downturn

The deal is a byproduct of excess private equity funds sitting around and the stresses piling up on public health care companies, said Evans.

There’s an immense reserve of private equity capital as investors look for better returns than those afforded by the stock and bond markets, said Evans. A lot of money is earmarked for health care — take, for instance, the record Cressey & Co. fundraise — as companies look for ways to finance capital-intensive expansions.

Carpenter, who is respected by Wall Street, according to both Evans and Strole, may have had a strong enough relationship with top stockholders to say “bear with us” while the company addresses challenges and defines its path — but it’s an easier task out of public view.

“The impatience on Wall Street, the quarter-to-quarter obsessions aren’t ideal for turning the battleship,” said Evans. “Going private is a good way to restructure, do what you need to do and then bring it back in a reimagined way, if it survives.”

Strole pointed out that LifePoint has had some challenges explaining to investors hiccups it’s faced while integrating a few acquisitions from a few years ago — an unusual struggle for the management team.

“I think now they are able to continue that process over time, hopefully more effectively, and focus more effort on improving that process (than) worrying about outside investors,” said Strole.

Carpenter wrote, “as a private company, and with Apollo’s support, we believe we will be even better positioned to serve our communities and ensure that our company continues to grow and thrive. … This will allow us to partner with our investor and leverage their expertise in ways we could not as a publicly held company.”

The deal made sense from a shareholder perspective and as a potential exit strategy for Apollo from RCCH. But Strole found the valuation interesting given “there are a lot of headwinds out of control of the company that could deteriorate over time.”

The rural portfolio means the underlying hospitals are more vulnerable to a single employer closing, thus leaving a cluster of people without commercial insurance, as well as changes to Medicare, or Medicaid at the state level.

Given low unemployment and other factors indicating the country is in the late stage of an economic cycle “it feels like they are buying an asset that’s economically sensitive nearing the end of a cycle,” said Strole.

Aging patients and nation’s aging health infrastructure clash with modern training, care systems

LifePoint and RCCH hospitals are almost always the only facility in the immediate market because the population doesn’t support another. That characteristic is both an opportunity and a challenge, said Strole. The hospital is protected from incoming competition, but has to operate on a tightening budget and fewer people.

Looking forward, Strole expects the larger LifePoint to start moving toward more urban areas to which it can connect its non-urban facilities.

Evans thinks urgent care and freestanding emergency rooms are in LifePoint’s future — similar to HCA Healthcare but for different reasons. Many of the hospitals were built more than 60 years ago with a Congressional act after World War II — not because the population supported one.

To that end, Evans said, LifePoint could pursue alternative care points that treat lower acuity cases in a hub-and-spoke model that sends patients to its hospital nearby.  

Rethinking its access points and adding more urban locations could help ease a constraint: physician recruitment. Location and patient volume makes it tough to recruit physicians, which Evans said gets talked about as a failure by hospital or company management, but is more of a reflection of on-the-ground reality.

LifePoint mentions the competition for specialists, including cardiologists, urologists and oncologists, as one of its risk factors because demand is higher everywhere for those. Yet, it’s also a struggle to recruit primary care physicians. There are fewer of them coming out of medical school and they can make more money in urban areas.

“The fact of the matter is that they don’t have the patient flow for the highly specialized system we have today,” said Evans. “It isn’t a failure of them to recruit. It’s a failure of the demographics not having the patient flow to maintain your specialization because we don’t really train (primary care) practitioners like we did.”

 

Photo by Jordan Ladikos on Unsplash