Local physicians’ group seeks purchase of Lutheran Health Network

May 16th, 2017

By Kevin Leininger | The News-Sentinel

Reportedly concerned by a lack of corporate investment and the resulting impact on medical care, a group of doctors Monday was expected to make a bid to acquire the Lutheran Health Network from Community Health Systems of Franklin, Tenn., which currently operates 146 hospitals in 21 states.

The meeting between the CHS Board of Directors, Lutheran CEO Brian Bauer and several physicians follows eight months of discussions that could result in new ownership for the eight-hospital Lutheran network for the first time since 2007, when the company based in suburban Nashville bought then-owner Triad Hospitals Inc. for $6.8 billion. About 300 physicians are participating in the proposed ownership group, which would be backed by a private equity firm and possibly other investors. Doctors currently own about 20 percent of the Lutheran network, which also includes RediMed clinics and other facilities.

Sources indicate Lutheran facilities provide the highest rate of return of all CHS properties, but the parent company's recent  financial performance has been less robust. In its annual report, CEO Wayne Smith called 2016 a "transitional year" and said strategies had been put in place to produce better results after performance fell short of expectations most of the year. Those strategies included the sale of 38 hospitals and other assets, which helped reduce long-term debt from $16.6 billion to $14.8 billion. Net revenues were $18.43 billion in 2016, down 5.1 percent, producing a net loss of about $1.72 billion. CHS stock dropped 43 percent in a single day last fall to about $10 per share, down from $52 on June 1, 2014. That was the year CHS agreed to a $98 million federal settlement of a lawsuit alleging it admits patients to hospitals when it wasn't medically necessary in order to bill Medicare, Medicaid or other insurers.

All of which, sources say, resulted in pressure to control costs at the local level, resulting in staff reductions. Although CHS last week announced plans to invest $500 million in the Lutheran network, the sources say many needs have gone unmet. Many patient beds are more than 25 years old, and local hospital officials have been seeking replacements for more than a decade. It is unclear what affect, if any, a change of ownership would have on the proposed $500 million upgrade.

Bauer declined comment, and CHS Senior Vice President/Corporate Communications and Marketing Tomi Galin would not discuss a possible sale. She did say, however, that CHS remains "very focused on the long-term success of Lutheran Health Network. We are very excited about the $500 million capital plan announced (Thursday) and the opportunity to make a transformative investment that will enhance patient care and expand health services, as well as bring jobs and other economic benefit to the community."

Of the 114 serious medical errors reported by Hoosier hospitals and surgical centers in 2015, nine occurred at Lutheran Health Network facilities and two at Parkview Health facilities.

Although CHS' poor 2016 financial performance resulted in Smith's total compensation being reduced from $10.4 million in fiscal 2015 to $5.8 million after $26.4 million in 2014, many of the parent company's expenditures are questioned locally. Top executives have received total compensation of nearly $330 million since CHS bought Lutheran, and Board of Directors members have been paid more than $19 million during that time. CHS executives are also able to use corporate aircraft for personal use, and Smith has received about $2.45 million since 2006 for serving as a member of the board of Praxair, a Connecticut medical oxygen firm that does millions of dollars in business with CHS every year.

If the board and the new would-be owners agree to pursue a deal, the two sides would be expected to sign a non-disclosure agreement and enter a period of additional review and negotiation before settling on a final price. Lutheran Health Network has annual revenues of about $1.5 billion, generating a profit of about $300 million.

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