Organizational analysis of community health systems in Tennessee

Community Health Systems (CHS) is a large corporation that owns and operates full-service hospitals in non-urban areas. In most such areas, CHS is typically the sole or primary acute care services provider. The company currently operates some 75 hospitals with about 9,200 licensed beds in more than 20 states, with most found in the southern United States. These hospitals offer a variety of inpatient and outpatient medical, surgical, and emergency services. Some of the hospitals also offer skilled nursing and home health services. CHS seeks to control supply costs by means of its membership in the group purchasing organization HealthTrust, and this organization negotiates price agreements with suppliers on behalf of its members. The company analyzes its mission and its operation to see how the two mesh and to determine the population served, the various services that are needed most, ways of reducing costs, laws that may apply to the operations in different states, and much else that enables the company to maximize profits while maintaining a high level of service.

Community Health Systems (CHS)

Community Health Systems, Inc., either directly or through its subsidiaries, owns, leases, and operates acute care hospitals serving as the principal providers of primary healthcare services in non-urban communities. When the company reported on December 31, 2006, it owned, leased, or operated 77 hospitals across 22 states, with an aggregate of approximately 9,117 licensed beds. On February 1, 2007, the Company executed an agreement to acquire the 159-bed, Lincoln General Hospital in Ruston, Louisiana. As of November 1, 2006, CHS acquired Campbell County Hospital, a 99-bed facility located in Weatherford, Texas. On November 1, 2006, CHS acquired Union County Hospital, a 25-bed facility located in Anna, Illinois. As of October 1, 2006, the company completed the acquisition of HelpSource Home Health, a home health agency located in Wichita Falls, Texas. As of September 1, 2006, the Company completed the acquisition of Humble Texas Home Care, a home health agency located in Humble, Texas. The company has continued to acquire such facilities in different states. Reuters characterizes the business of the company as follows:

The Company generates revenues by providing a range of general hospital healthcare services to patients in the communities, in which it is located. Services provided by the Company's hospitals include emergency room services, general surgery, critical care, internal medicine, obstetrics and diagnostic services. As part of providing these services the Company also owns, outright or through partnerships with physicians, physician practices, imaging centers, home health agencies and ambulatory surgery centers (Community Health Systems Inc.: Company Description, 2007, para. 3).

A major part of the strategy for this company is the acquisition of existing hospitals and hospital chains (Saito-Chung, 2002, p. B06). This has become the primary way this company grows, and it pursues this strategy in stat after state. The company has started to organize regional operational divisions around different groupings of hospitals, as it has done for seven hospitals in Tennessee, along with Parkway Regional Hospital in Paducah. All of these facilities are within an hour of Jackson, Tennessee. The intent is to integrate existing facilities into another hospital company's network, and this is said to be a delicate procedure. Parkway was already in the Community Health system, and integrating thee other seven hospitals into the system gives administrators in the new hospitals a resource they can use during the transition period. Such a move can also accelerate the process of integration. As can be seen from the above, CHS has been acquiring new hospitals at a rapid rate, making CHS the largest of the three publicly trade hospital companies focusing on the rural market, ahead of LifePoint Hospitals, Inc. And Province Healthcare Co. Inc. In Nashville. Come have raised concerns about growing too quickly, but the company does not worry about this because it ahs demonstrated the ability to acquire hospitals and to do so successfully as an integral part of the company strategy (Growing CHS to group acquired hospitals in new division, 2003).

While acquisition is the primary strategy for the company, executives note that deciding which hospitals to buy is not a simple task. CHS does not simply buy every hospital chain on the market, and the company is said to be selective in making this decision. The company seeks opportunities in suburban areas and areas where it has no holdings as yet. CHS does due diligence in examining any offer and in deciding which hospitals to buy and which not. In each case, the company also has to gain the needed regulatory approval for the acquisition, which is usually based on issues such as financial soundness for stockholders and the maintenance of some competition in a given region. The approval process can take several months in most cases (George, 2001, p. 10)..

Company History

Community Health was founded by Richard Ragsdales and E. Thomas Chaney, and they assumed an active role in running the company. The company was founded in 1985. In the beginning, Ragsdales served as the company's chairman and Chaney served as its chief executive officer. The first hospital they controled was the Fannin Regional Hospital in Blue Ridge, Georgia, acquired in January 1986 with 34 licensed beds, the fewest number of beds acquired by the company during its first twenty years in business. This was followed by the purchase of two more hospitals, the Highland Medical Center, a 123-bed hospital in Lubbock, Texas, and the Russell County Medical Center, a 78-bed hospital located in Lebanon, Virginia. The first three hospitals provided a blueprint for expansion as the company set its sights on acute-care hospitals operating in rural communities, focusing on towns with populations ranging between 20,000 and 80,000. Candidates deemed suitable were generally operated as nonprofit hospitals and typically were suffering from financial problems. Community Health operated as a publicly traded, for-profit, enterprise, and it served as a sort of savior for troubled rural hospitals. For Ragsdales, Chaney, and their successors, Community Health's strategy allowed them pursue two missions at the same time: serving the public good and focusing on generating profits. The strategy was sound and provided service for a specific population. According to U.S. Census Bureau figures, one-quarter of the country's population lived in rural communities during the early decades of the company, and these communities were served by hospitals spread far apart. A given community was often dependent on a single hospital for providing healthcare. Community Health focused on communities in which it would become the sole provider of general hospital services, and the company targeted hospitals that were located more than 25 miles from any competing hospital. This strategy left Community Health free from any meaningful competitive pressures while also aiding the community being served. The financial well-being of an isolated hospital was clearly integral to the health of the community it served. The continued existence of the hospital provided another benefit to the community by serving as one of the community's primary employers. Resistance was seen to the idea of a corporation taking over control of nonprofit hospitals in certain areas of the country, but more often communities welcomed the arrival of Community Health, whose intervention rescued financially failing hospitals and often meant an improved level of healthcare at the same time (Community Health Systems, Inc., 2005).

The company was effectively becoming a company in the corporate turnaround business, after which it would improve the management of each acquisition and gain a more valuable business through its efforts. Community Health made capital improvements in the hospitals it acquired and also expanded the services offered by these hospitals. CHS invested in more sophisticated emergency rooms and added physical rehabilitation centers and capabilities such as laser surgery. The company also recruited doctors, and this was often a difficult task in the more remote areas of the country. CHS would attract young physicians by offering subsidized office space and other incentives. These changes would be combined with the standardization of tasks such as accounting, all presided over from a central office, and the result was better, more profitable hospitals. According to Forbes magazine in December, 1991, the company was "turning marginal outfits into big moneymakers" so that revenues by the end of 1991 reached $138 million, from which the company made $9.3 million in profits (Community Health Systems, Inc., 2005).

The financial growth of the company in the 1990s increased rapidly, and this increase was driven by several factors seen as offering ideal conditions for Community Health's acquisition strategy. More than 450 community hospitals, most nonprofits, went out of business during the decade, and this reduced the resistance of for-profit companies coming in to salvage nonprofit hospitals. Chaney was in charge of the day-to-day management of the company and made his most aggressive move during this period by completing the acquisition of Atlanta-based Hallmark Healthcare in 1994, an acquisition that nearly doubled the size of Community Health, giving the company 18 hospitals.

Roughly a year later, a leadership dilemma led to dramatic changes as Chaney announced he no longer wanted to lead the company, giving Community Health's board of directors a deadline for his departure, leading to a scramble for a replacement. The company's board believed they could not find a replacement for Chaney by the date of his intended departure, and so the directors put the company up for sale. In March 1996, the New York-based investment banking firm Merrill Lynch was hired to generate interest in the company, and a suitable buyer was found, a New York-based private investment firm named Forstmann Little & Co. This company was headed by Theodore Forstmann, a leveraged buyout specialist. Forstmann's firm had more than $20 billion invested in 20 companies and made its living by acquiring companies and selling them for a profit. Forstmann Little acquired Community Health in 1996, and this was the firm's first purchase of a healthcare company. The firm paid $1 billion for Community Health, which at the time operated 38 hospitals in 18 states, and this change in ownership made Community Health a privately held company. In January 1997, Wayne T. Smith was named president of Community Health and was selected as its chief executive officer in April 1997. He joined Community Health after spending more than two decades working for Louisville, Kentucky-based Humana Inc., joining the healthcare provider in 1973 after serving a four-year stint as a Captain in the U.S. Army Medical Services Corp. Smith rose through the executive ranks at Humana, becoming its president and chief operating officer in 1993 (Community Health Systems, Inc., 2005).

Community Health now started began expanding its portfolio of properties, to become the largest operator of rural hospitals in the country. The company acquired many other companies and enjoyed its status as a privately held company, making it possible to develop into the country's largest player. Converting to public ownership was seen as inevitable, however, in part because Forstmann Little wanted to get a return on its investment, but also because Smith needed to obtain capital to fuel the company's expansion drive. Community Health did indeed again become a publicly held company in 2000. Investors responded by buying the stock, and revenue in 1998 exceeded $850 million and passed the $1 billion mark the following year. The company completed its IPO in June 2000 and raised $245 million from the offering and another $269 million through a secondary offering of stock before the end of the year. By the end of 2000, sales had increased 24% to reach $1.34 billion (Community Health Systems, Inc., 2005).

The company came under greater scrutiny as it reached a higher position in the industry. The appraisal from the critics was positive and supported the soundness of the company's strategy:

Community Health adhered to a disciplined acquisition strategy, selecting hospitals that were ailing for reasons that were not related to the market they served. "You can fix bad hospitals; you can't fix bad markets," an analyst noted in the June 24, 2002 issue of Investor's Business Daily. Community Health relied on strong management and a centralized office to keep costs down, recouping the investments it made in recruiting health specialists, adding new services, and implementing new information and supply systems by carefully following its acquisition criteria. Once a hospital was purchased, it often took several years for the hospital to reach Community Health's standard of optimal performance -- one of the reasons the company was unprofitable during the late 1990s -- but after the property's financial performance improved, Community Health gained a valuable money-maker (Community Health Systems, Inc., 2005)

As Community Health neared its 20th anniversary, Forstmann Little reduced its stake in the company three times after the IPO and in 2004 sold its remaining 23% interest for $560 million, nearly tripling the firm's original investment. Between 1996 and 2004, the company spent $1.8 billion and acquired 47 hospitals. Continued expansion would become the mark of the company.

Company Management

The management chart for CHS, as set forth by Reuters this year, stands as follows:

Management Chart

http://www.investor.reuters.com/images/arrowMoreU.gif

Management Since

Chairman of the Board, President, Chief Executive Officer

Smith, Wayne T.

Chief Financial Officer, Executive Vice President, Director

Cash, W. Larry

Senior Vice President - Group Operations

Portacci, Michael T.

Senior Vice President - Group Operations

Newsome, Gary D.

Senior Vice President - Group Operations

Miller, David L.

Senior Vice President, General Counsel, Secretary

Seifert, Rachel a.

Senior Vice President -- Group Operations.

Hussey, William S.

Vice President, Corporate Controller

Buford, T. Mark

(Community Health Systems Inc.: Management, 2007).

The most recent financials as detailed by Reuter's are as follows:

Key Numbers (Currency in Millions)

Income Statement

Total Revenue

Gross Profit

Total Operating Expense

Operating Income

Net Income before taxes

Net Income After taxes

Net Profit Margin

Balance Sheet

Total Assets

Current Assets

Total Liabilities

Current Liabilities

Long-Term Debt

Total Debt

Total Equity

Cash Flows

Cash from Operating Activities

Cash from Investing Activities

Cash from Financing Activities

Net Change in Cash

Growth Rates

Years

Revenue

COGS

Total Operating Expense

Operating Income

Net Income

Total Assets

Total Liabilities

Total Equity

Cash Flows

Revenue (Millions)

Q1

Q2

Q3

Q4

12 months

Net Income

Millions)

Q1

Q2

Q3

Q4

12 months

N/a (Community Health Systems Inc.: Financial Summary, 2007).

The primary competition faced by this company stands as follows:

www.investor.reuters.com/GoTo.aspx?sortby=0&ticker=CYH&symbol=CYH&.t=%2fbusiness%2fbuscompany%2fbuscompfake%2fbuscompoverview&sortorder=ascRevenue (M) www.investor.reuters.com/GoTo.aspx?sortby=1&ticker=CYH&symbol=CYH&.t=%2fbusiness%2fbuscompany%2fbuscompfake%2fbuscompoverview&sortorder=descProfit Margin (12 mos) www.investor.reuters.com/GoTo.aspx?sortby=2&ticker=CYH&symbol=CYH&.t=%2fbusiness%2fbuscompany%2fbuscompfake%2fbuscompoverview&sortorder=descEmployees www.investor.reuters.com/GoTo.aspx?sortby=3&ticker=CYH&symbol=CYH&.t=%2fbusiness%2fbuscompany%2fbuscompfake%2fbuscompoverview&sortorder=descMarket Cap (M)

Tenet Healthcare Corporation

Triad Hospitals, Inc.

Community Health Systems

Universal Health Services, Inc. (Community Health Systems Inc.: Company Overview, 2007).

The management of the company notes the following about the target market for the company:

We target growing, non-urban healthcare markets because of their favorable demographic and economic trends and competitive conditions. Because non-urban service areas have smaller populations, there are generally fewer hospitals and other healthcare service providers in these communities. We believe that smaller populations result in less direct competition for hospital-based services. Also, we believe that non-urban communities generally view the local hospital as an integral part of the community. There is generally a lower level of managed care presence in these markets (Prospectus Summary, 2006).

Community Health Services is one of the largest employers in Tennessee, and the company states that it sees keeping employees happy and motivated is the key to continued success. To this end, the company fosters opportunities for development, motivation, encouragement, and education. The company also states that "employees are best able to enhance and put their individual skills to work" (Career opportunities, 2007). The company also states that the dedication of employees goes beyond demonstrating professional excellence to demonstrating a commitment to their surrounding communities by stepping up and taking part in blood drives, United Way initiatives, national relief efforts, and other philanthropic endeavors. The company also has a written policy concerning the treatment of employees:

This organization is an Equal Opportunity Employer and is committed to workforce diversity. Employees also sign an acknowledgement of a Code of Conduct that is designed to provide guidance in performing daily activities in accordance with all federal state and local laws, rules and regulations. This code is an integral component of our Compliance Program and reflects a commitment to achieve goals within the framework of the law through a high standard of business ethics and compliance (Career opportunities, 2007)..

The company benefited from changes in reimbursement in 2002 after the period of recession that preceded that period (Reimbursement prospects support Community Health, 2002). Another reason for the success of the company in recent years has been its purchase of many rural hospitals that are essentially the only medical care facility for the population of the region. CHS focuses on rural and suburban areas that often have only one medical care facility. Such hospitals may not have all the equipment that a big city hospital has, but these hospitals are not as primitive as they once were. One of the reasons for this has been the infusion of cash and expertise by companies like CHS, which has invested millions of dollars to bring many of those facilities up to speed with the latest gear. CHS buys hospitals that are struggling financially but that operate in solid markets. The company targets small markets, meaning those generally with populations of less than 100,000 in areas served by a single hospital. These markets also have a strong economic base, allowing the company to thrive. The company also utilizes strong management and a centralized office to keep costs in line and distribute capital where it is most needed. The company buys a facility and then adds a CT scan, MRI, or cardiac catheterization unit. The company also expands the emergency room and recruits specialists to the hospital.

This approach made it possible for Community Health to have eight straight quarters of 100% or better year-over-year earnings growth, with sales growth that topped 20% in each of those quarters (Watkins, 2002).

Acquisitions are not the only reason for the growth of the company. The company's same-store sales grew at 9.5% during the first quarter, a figure that has hovered in the high single digits to low double digits for eight quarters. In 2002, some industry factors threatened to slow growth moving forward, and these included wage inflation for nurses, medical liability costs, and Medicare reimbursement issues. As one analyst noted,

Community Health has some protection against those risks, however. It should be able to maintain strong growth over the next couple of year as it integrates acquired hospitals into its system and improves performance (Watkins, 2002, p. A04).

Once Community Health buys its hospitals, it institutes a set method of adding new information and supply systems, recruiting specialists, and adding services. The syste4m used has been so set that CHS can buy hospitals faster than similar firms. The first order of business is to order equipment, collect bills faster, and invest capital where it is needed. This part of the process also puts local communities on the side of CHS. An example given by Watkins (2002) is the 1997 buy of a 56-bed hospital in Granbury, Texas, 40 miles from Fort Worth:

Community Health added MRI and CT scanning machines to the facility. The company also installed an advanced lab that had hospitals in Dallas and Forth Worth shipping samples there to be tested (Watkins, 2002, p.A04).

As one manager states, by injecting capital, the company shows the local community that it cares.. This is especially important given that rural hospitals have struggled in recent years, in part because many never recovered from Congress's 1997 move to control health care spending. Nonprofit hospitalshave even more reason to sell because they rely on endowments for capital. With the stock market in a long slump, their access to capital is on the decline. These are also the types of facility that Community Health specializes in buying,

The state of credit markets also benefited CHS in its purchases. The company took advantage of the existing environment in 2002 by using an early refinancing of its bank facility. With this new credit, the company's pricing was much improved (Community Health taps into institutional demand, 2002). In 2004, CHS again altered its investment structure in order to reduce its risk (Community Health Systems in. scales back on risk, 2004).

Medical Technology

One of the ways CHS modernizes acquired facilities is through the implementation of new medical technology and also information technology geared to keeping medical records and making the data available for medical personnel. CHS also contracts with various third parties for services related to record keeping and the implementation of new technology.

Current computer technology being used to manage medical records is vast. Many hospitals have data bases containing all patient history, appointment dates, and previous diagnoses. Systems such as the Medical Information Service via Telephone (MIST) used at the Medical Center of the University of Alabama at Birmingham provides health care professionals immediate access to medical information. Accessing this information can be accomplished from a telephone, computer terminals within the hospital, modems, and more recently, facsimile machines. For the medical patient, CIGNA Corporation offers their clients medical information through the use of a PC. Newer systems are being developed all the time, and the need is increasing for physicians to be able to make full use of computer technology if they are to retain control of a system governed more and more by access to information.

One of the tasks of the information manager, along with healthcare professionals is to select the program that will best serve the needs of the given situation. Larkin (1996) emphasizes the challenges in information technology today and notes that insurers are already making full use of information systems to enforce guidelines and to dictate capitation rates on claims data. The difficulties in the Medicare system today necessitate increasingly sophisticated efforts on the part of care buyers along with the insurance industry to lower costs, and to this end, physicians face a variety of information challenges ranging from the everyday, such as how to deal with e-mail, to the highly abstract, such as developing universal data-exchange formats flexible enough and powerful enough to accommodate clinical needs. In terms of the business of healthcare, one of the important information challenges faced by physicians is for reliable utilization data to negotiate with managed care plans (Larkin, 1996, p. 6-7).

As with most major computer systems, there is a very large start-up cost in implementing a network computer system; however, it is projected that the cost of maintaining these systems is minimal and the benefits of a medical computer system boundless. After the initial set-up and training, costs will be limited to servicing and operation. Furthermore, efficiency of information storage and transport will greatly increase. There is also the added benefit of having the latest technology in treatment and procedures for physicians because there is no delay in obtaining the most current medical information. By accessing diagnostic and laboratory results and other patient information at a moment's notice, health care professionals as well as patients will no longer have to wait days or weeks for medical information. The increasing incorporation of computer technology into the health care system is taking place in the increasing computerization of all aspects of society, and this in turn has created some trepidations as to how the new technology will be used. Health care information technology is a growing business marked by new developments and more flexible systems, and HBO & Co. is the industry leader today. The health care industry in the past has invested little in information technology, and software purchases were generally for billing and claims processing. This is changing as insurers are demanding more financial information from health care providers, and they also want better clinical information in order to assess the long-term outcomes of care delivery from different providers. Software companies like HBO & Co., Shared Medical Systems, and Meditech have been writing software and installing applications for financial, laboratory, radiology, and pharmacy departments in acute care hospitals (Osterland, 1996, p. 42).