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=businessbuscompanybuscompfakebuscompoverview&sortorder=ascRevenue (M) www.investor.reuters.com/GoTo.aspx?sortby=1&ticker=CYH&symbol=CYH&.t=businessbuscompanybuscompfakebuscompoverview&sortorder=descProfit Margin (12 mos) www.investor.reuters.com/GoTo.aspx?sortby=2&ticker=CYH&symbol=CYH&.t=businessbuscompanybuscompfakebuscompoverview&sortorder=descEmployees www.investor.reuters.com/GoTo.aspx?sortby=3&ticker=CYH&symbol=CYH&.t=businessbuscompanybuscompfakebuscompoverview&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.
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