The Lutheran Health Network issue, at last

Being a somewhat savvy news-listener and a frequent listener of the Pat Miller show on WOWO, I have watched the unfolding drama of the Lutheran Health Network attempted buy out.  For non- locals, the gist goes like this:  Lutheran Health Network is a for-profit hospital chain in our area.  Recently, a group of doctors frustrated with lack of investment in the network by parent Community Health Systems out of Tennessee (which is rapidly gaining the status of a dirty word), put together a $2.4 billion bid to buy the system back from CHS, to which CHS responded with a "thanks but no thanks" and firing the two top local executives in what appears to be a big fit of pique for daring to challenge them.

Saturday morning, I read an article from a dude associated with the AF of L who made several good points (and one shockingly bad one) about the whole thing, which got me curious enough to dig into the whole thing.  In no particular judgment or order, here's some of what I learned.


1995- the 34 Lutheran churches that ran LHN were looking for a way to secure resources in order to build them into a true regional chain.  Along comes Quorum Health Management, a consulting firm who buys the network up.  They begin to grow, eventually building Dupont Hospital up north to compete with the palatial goliath that is Parkview North (a non-profit that is doing quite well thank you.)  At this point, I pose the union dude's first assertion (which he made by saying he wasn't going to spend time making it), that one should call into question why a hospital or network should be a for-profit in the first place.  With the deteriorating insurance situation, the tons of property taxes that you are paying and Parkview North isn't, etc., it doesn't follow that running a for profit health network would be especially profitable.  And this will come a bit clearer as we go on.

Now we move to 2006.   Quorum has been bought out by a group called Triad, and now Triad is looking for a buyer.  Along comes CHS, which, despite being half again bigger than Triad, is actually pulling in almost a billion less a year.  The two merge to become the biggest incompetently run health enterprise in America.  Now, Chris, was that nice?  Okay, maybe I should have said illegally run.

Because CHS has a long history of having to pay out for fraudulent practices, most of them related to forcing docs to admit patients who don't need admitted in order to screw Medicare.  Since 2014 they have paid out over $184 million in DOJ fines and lawsuits- and in response to the first of these, they were required "to enter into a corporate integrity agreement that required the Company to participate in compliance efforts."  More than half the payouts have come SINCE then.

So now we get to recent times, and the company has lost over 70% of stock value since 2000.  We already have disproved Union Guy's second thought, that having a doctor's union to represent LHN against CHS, because one of the Triad acquisitions, McKenzie-Willamette's healthcare workers' union, SEIU, Local 49, claimed that workload increases, slashed benefits, and staff reductions had lowered the quality of both patient care and quality of life for employees. The union, in its "Profits Before Community" campaign against the hospital, continues to highlight that profits have tripled while charitable care and employee benefits have steadily decreased since the hospital moved from a non-profit to a for-profit enterprise under CHS.  And yet, CHS was still doing the same thing to LHN 7 years later, so the union is doing a helluva job collecting dues, and not much else.

But CHS still of a mind that acquisition was the best way out of the growing financial mess they were in.  Along comes Health Management Associates, another national hospital parent company with a record of crooked dealings comparable to CHS's- even landing a feature on 60 Minutes.  They were under attack from a group led by Glenview Capital Management CEO Larry Robbins, who was buying up shares in spite of a "poison pill" voted in by the board that converted common stock into rights to purchase pieces of preferred stock at 5 times the price.   Robbins won and forced HMA to accept CHS's buy offer.  Robbins thought at the time that CHS would give them the resources he needed to make a profit out of the struggling hospitals in the HMA group.

He was wrong.  And by 2016, Robbins sold ALL his interest in HMA and CHS, saying he saw no way to fit the 30 hospitals profitably into the CHS system.  And why would this be?  Well, for one, the only thing CHS had been growing in this time was a mountain of debt far outstripping that of similar systems- in the $15 billion range as we speak.  So now, CHS decided that they would have to take drastic measures.  They spun off Quorum's management and consulting services- which didn't lighten the load by much but nearly halved their income.  Then, they began jettisoning selected hospitals- about 38 of them by this point.

And then, enter Tianqiao Chen.

Chen, the 98th-richest man in mainland China, made a fortune designing online gambling platforms.  Now, he is an opportunist who hunts for bargains and becomes a passive stockholder, patiently hoping things will turn around- unlike Robbins, who wants a seat at the table to turn things around.  Chen began buying bigger and bigger chunks of CHS common stock in the fall of last year.  And a bargain it was indeed- a stock that cost $40 just a year before got demoted to $10 a share by this point.   By October, he had a 13.8% stake- by quite a bit, the largest, larger than Robbins ever had.  At which point, CHS voted in their own poison pill, to be triggered if Chen (or anyone else) tried to gain more than 15% of common stock.  Chen, for his part reiterated, "which I have said to CHS management many times", that he no interest in taking over the group.

By his track record, I believe him.  I think that CHS might be better served worrying about the other extreme- what happens when Chen decides this dog is indeed dead and pulls out?  It wouldn't take much of a loss on his part to ruin them at this point.

Which brings us to the doctor's bid- which several valuations agree was at least $1 billion too low.  Plus the group is undercapitalised, and CHS rightly refused the bid on the basis that they couldn't commit to the half-billion of investment in LHN that CHS says they are going to make.  But here's the pregnant question- if CHS is $15 billion in debt, how can THEY commit to the investment?

And at the end of the circle, we come back to that old truism, now directed at the Lutheran Church whose desire for growth kicked this all off in the first place- be careful what you wish for.