Community Health Systems Inc. said it would spin off 38
hospitals from California to the Deep South to form a new publicly
traded company that focuses on smaller, often rural markets.
The plan stands in contrast to the broader pattern among U.S.
health-care companies and providers, which have been rushing to
consolidate to build market share, find savings and steady
themselves for a fast-changing market under the Affordable Care
Act.
Under Community's plan, a new publicly traded company to be
called Quorum Health Corp. will run the hospitals as well as
Community's management and consulting subsidiary, Quorum Health
Resources LLC. Community says the spinoff is expected to be
tax-free to shareholders and the company, and completed in the
first quarter of 2016.
The proposed company's assets generated about $255 million in
earnings before taxes, interest and other items on $2.1 billion in
2014 revenue, Community said. That is about 11% of Community's
overall revenue that year. The spinoff hospitals were less
profitable than the company as a whole in 2014.
Both companies will benefit from the 2010 health law, said
company executives in a call with investors Tuesday. "We have so
many opportunities with the continuation of the roll out of the
Affordable Care Act," said Wayne Smith, Community's chairman and
CEO, noting that nine of the 16 states where Quorum will run
hospitals have expanded Medicaid under the law.
He said executives had been considering the spinoff for a while.
The June Supreme Court ruling upholding heath-law subsidies in many
states "was a good sign that we should go forward," he said.
Mr. Smith said Community had in recent years focused on midsize
urban markets, which have seen stronger growth, and that it had not
been actively acquiring smaller rural hospitals or making
substantial investments in its existing small-market assets.
"We haven't bought any smaller hospitals unless they're
synergistic to our network," Mr. Smith said. "We've been deploying
capital in our larger markets," he said. Those larger markets have
stronger employment rates and more people covered by higher-paying
managed-care plans.
But, he noted, many are for sale around the country, adding that
Quorum could focus on growing in that niche. He said he believed
unemployment levels would improve in those markets, buoying the
spinoff hospitals.
Community will retain 160 hospitals in 22 states, and said in a
statement that it would remain among the largest hospital operators
in the country and would benefit from its scale. Mr. Smith said
Community would continue to focus on bigger markets.
The Quorum hospitals range from small ones with about two dozen
beds such as Mimbres Memorial Hospital in New Mexico, to a handful
of facilities with more than 100 beds, including Illinois' Gateway
Regional Medical Center's more than 300 beds, records show.
Four of the hospitals Community is spinning off were owned by
Health Management Associates until Community acquired that rival in
a deal that closed early last year.
Community also reported Tuesday second-quarter earnings of $111
million, or 96 cents a share, compared with $42 million, or 37
cents a share, a year earlier. Patient stays declined 2.2% in the
second quarter compared with the same period last year, though
emergency room visits rose 4.0%, the company said.
The company said it now expects profit of $3.65 to $4.10 a share
for the year, up from an earlier projection of $3.40 to $4.05.
Write to Christopher Weaver at christopher.weaver@wsj.com and
Cassandra Jaramillo at cassandra.jaramillo@wsj.com
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