Academic journal article Journal of Healthcare Management

The Impact of HCA's 2006 Leveraged Buyout on Hospital Performance

Academic journal article Journal of Healthcare Management

The Impact of HCA's 2006 Leveraged Buyout on Hospital Performance

Article excerpt

EXECUTIVE SUMMARY

Leveraged buyout (LBO) arrangements are a reorganization strategy whereby a firm assumes a substantial amount of debt to buy back its publicly held stock to become privately held. LBOs offer a firm several advantages and have the potential to increase efficiency. In the past 20 years, several healthcare firms have engaged in LBOs, but the literature on performance changes in healthcare organizations as a result of an LBO is limited. In this article, we report on a study that examined the performance of Hospital Corporation of America (HCA) hospitals before and after the LBO that was initiated in 2006. We used data from the Medicare Hospital Cost Report Information System and analyzed data from 130 HCA hospitals and 490 comparison hospitals. Findings show that HCA hospitals reduced expenses and their number of full-time equivalents (FTEs) relative to local competitor hospitals. HCA hospitals' cash-flow-margin ratio was substantially higher when adjusted for its local competing hospitals at the beginning of the LBO as well as at end of the LBO. When compared to local hospitals, HCA hospitals had a significant decrease in their capital investment in fixed assets from 2006 to 2009. These findings underscore the effectiveness of HCA's management strategies to repay debt and increase the value of the company, and they are informative for healthcare firms and their managers who are considering LBOs.

INTRODUCTION

In the past 20 years, several large, publicly traded hospital companies used a leverage buyout (LBO) arrangement whereby they took on a substantial amount of debt to buy back their publicly held stock to become privately held companies (Clement and McCue 1996). During this period, several of these companies engaged in repeated cycles of publicly offering stock and then repurchasing stock through an LBO a few years later. These efforts were undertaken to improve their performance given the financial markets at the time. In March 1989, Hospital Corporation of America (HCA) recapitalized itself into a private company and went public again Aree years later. The desire to generate greater efficiency in operations may have been the reason for the 1989 LBO because at that time, the stock price was believed to be undervalued (Clement and McCue 1996). In July 2006, HCA again used an LBO. Three private equity firms along with the Frist family and senior management purchased HCA for $33 billion (Berman, Naik, and Winslow 2006) by assuming $11.7 billion in debt and accessing debt financing for $16.8 billion [Corporate Financing Week 2006). In May 2010, HCA announced its intent to go public again with plans for an initial public offering (IPO) of $4 billion in stock (Galloro 2010a). On March 10, 2011, the company went public and raised $3.79 billion (Cowan 2011).

LBOs are a financial strategy that offers several advantages to for-profit healthcare organizations. First, LBOs increase management control of organizational resources. This type of arrangement allows management to overcome the conflict between owners (stockholders) and managers of the organization with regard to activities to generate revenues and earnings (Jensen 1986). Second, greater management control can result in decisions that increase a firm's efficiency, and excess revenues can be used to improve the firm and repay debt rather than be spent on the expansion of projects that meet management's own personal needs (Jensen 1986). Finally, senior managers with an equity interest in the LBO have the potential to receive substantial returns, which encourages focus on improving the performance of the company.

Because an LBO is a focused financial strategy for firms, understanding its impact on hospital performance is important. Unfortunately, there has been only a limited number of empirical studies of healthcare LBOs (Clement and McCue 1996; Kim and McCue 2012). Today, HCA is the largest publicly traded hospital system provider in the United States, with 163 hospitals and 109 freestanding surgery centers in 20 states and England (HCA 2012). …

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