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December 2, 2013

Yale, Tenet seek growth in Greater Hartford, beyond

Photo | HBJ File Yale New Haven Health System is making its first significant push into Greater Hartford.
Vincent Petrini, senior vice president for public affairs, Yale-New Haven Health System
Trip Pilgrim, senior vice president and chief development officer, Tenet Healthcare

Yale New Haven Health System is eyeing its first significant push into Greater Hartford with its recent affiliation with Eastern Connecticut Health Network, but its growth likely won't stop there.

The state's largest healthcare network could extend its reach and brand further into Hartford County, across the state, and even potentially outside Connecticut, a hospital official said.

“The scale of Yale New Haven Health System is self-sustaining, but there is a need for us to be part of something bigger,” said Vincent Petrini, Yale New Haven's senior vice president for public affairs. “We have to be prepared for growth.”

Yale's potential growth story may read like a common script these days as consolidation continues to sweep through the healthcare industry, but Yale is deploying a strategy relatively foreign to Connecticut.

In June, Yale New Haven System (YNHHS) announced a joint venture with an out-of-state, for-profit hospital company, and together the two organizations are pursuing the acquisition of Eastern Connecticut Health Network, which owns Manchester Memorial and Rockville General hospitals.

If approved, the merger would convert ECHN into a for-profit company. Yale's partner, Dallas, Texas-based Tenet Healthcare would manage and provide capital to ECHN, while Yale would offer ongoing clinical support.

YNHHS, however, would remain a nonprofit entity. It's not investing equity into its joint venture with Tenet, although it will recoup 20 percent of any profits.

Beyond the ECHN deal, the Yale-Tenet joint venture could serve as a platform to acquire other hospitals in Connecticut and nearby states, said Trip Pilgrim, senior vice president and chief development officer of Tenet.

Tenet Healthcare is trying to make a big push into Connecticut to extend its Northeast presence. The $16 billion company owns 78 acute care hospitals around the country, including three in Massachusetts. In October, Tenet acquired Tennessee-based Vanguard Health Systems for $1.8 billion. At the time, Vanguard was in the process of acquiring Bristol and Waterbury hospitals and ECHN. Tenet is continuing to pursue those deals. It wants to add Yale as a clinical partner in the Bristol and Waterbury hospital mergers.

As a business strategy, the joint venture makes a lot of sense for both sides, Pilgrim and Petrini said. Yale wants to expand its footprint and scale to deal with the changing healthcare environment, but lacks the capital to buy other hospitals. Tenet has deep pockets and access to capital markets but is new to the Connecticut market.

Yale's strong brand, clinical expertise and academic pedigree combined with Tenet's financing chops and national footprint could prove to be a good match, Pilgrim and Petrini said.

Still, their vision is far from becoming a reality. Tenet faces significant challenges adopting its for-profit model in Connecticut, which has been resistant to investor-owned healthcare companies. The state only has one for-profit hospital, and several groups, including unions and policymakers, have raised red flags about Tenet's entrance into the market.

A changing industry

YNHHS needs to expand its geographic footprint to prepare for a rapidly changing healthcare landscape that will require providers to manage patient populations, rather than simply provide sick care, Petrini said. The shift requires doctors to follow-up with patients after they leave the hospital.

To do that effectively, hospitals must expand their geographic reach so patients, regardless of where they live, have access to a continuum of care, Petrini said. Yale New Haven Health System, with hospitals in Bridgeport, Greenwich, and New Haven, sees patients from across the state and outside Connecticut, particularly from New York.

To build larger networks hospitals are turning to mergers and acquisitions. But nonprofit health systems, like YNHHS, have limited access to credit markets to finance deals. Yale is seeking a joint venture with Tenet, which has much deeper pockets and can raise equity, Petrini said.

“It also helps us establish greater scale, which is important because that drives down costs, without impacting quality care,” Petrini said.

As for Tenet, it didn't originally intend to enter Connecticut, but the opportunity arose after its Vanguard acquisition.

Sheryl Skolnick, a healthcare analyst with CRT Capital Markets in Stamford, said she believes Tenet is continuing to pursue Vanguard's Connecticut deals because the state offers an attractive market. Connecticut has little for-profit competition and a small uninsured rate compared to the rest of the nation, which promises a stable base of paying customers.

At the same time, Tenet inherited from Vanguard three Massachusetts hospitals, which it may want to grow into a regional network through its Yale joint venture.

The Yale affiliation is important, Skolnick said, as Tenet tries to acquire nonprofit hospitals, which it hasn't had recent success doing.

“When you are a new entrant and you are trying to aggregate networks you need that kind of brand name pull and best practices from an academic medical institution,” Skolnick said.

Tenet likely will invest significantly in Connecticut if its deals gain regulatory approval and try to establish partnerships with health plans and physicians, Skolnick said.

“Tenet could become the leading for-profit operator in the state,” she added.

Meanwhile, Tenet management does have ties to Connecticut. President and CEO Trevor Fetter sits on the board of The Hartford Financial Services Group, and he spends time in the state, Skolnick said.

Deal Roadblocks

The Tenet-Yale acquisitions face significant challenges. Industry officials still must convince policymakers that for-profit hospitals can provide the same quality care as nonprofit institutions.

Some healthcare advocates and lawmakers have questioned whether for-profit hospitals will meet the needs of uninsured patients and/or cut low margin programs or staff. Meanwhile, unions worry that for-profit operators will play hard ball on contract negotiations.

As of Dec. 31, 2012 (before its Vanguard acquisition), about 29 percent of Tenet's employees were represented by various labor unions, primarily registered nurses and service and maintenance workers, according to Tenet's annual report.

Pilgrim said Tenet provides more than $840 million annually in charity care and will continue to provide it in Connecticut. Tenet will also pay property taxes, which will be an added benefit of the for-profit model, he said.

Although lawmakers don't have a regulatory say in approving for-profit hospital deals, they do hold some power. In July, Gov. Dannel P. Malloy vetoed legislation that would have allowed Vanguard (prior to its acquisition by Tenet) to legally employ physicians, which put its Connecticut mergers on hold.

The bill was critical because it would have shielded Vangaurd from bumping up against anti-kickback laws if it purchased for-profit physician practices, a major trend among hospitals in recent years. In 2009, lawmakers passed a similar law that allowed nonprofit hospitals to legally employ physician practices through medical foundations. Since then, almost a dozen medical foundations have been formed, and nonprofit hospitals have aggressively acquired doctor groups.

Without that same ability, Pilgrim said, for-profit operators will be at a competitive disadvantage. Meanwhile, Attorney General George Jepsen wrote last week that the state should proceed carefully with for-profit hospital conversions, warning it could reduce market competition and lead to higher healthcare costs. Pilgrim said Tenet has a temporary solution to move forward with its Connecticut acquisitions, but they need a permanent, long-term fix during the next legislative session.

“Being able to employ physicians is a fundamental issue,” said Pilgrim.

As for more potential deals in Connecticut, Pilgrim said Tenet's goal right now is to complete acquisitions already in the pipeline. Down the road, Pilgrim envisions Connecticut's healthcare landscape being dominated by two or three systems, with Tenet being a major player.

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