Case Study: Elliott Davis Decosimo Healthcare Team Assists Claiborne County in Hospital Sale

Circumstance

Claiborne County Hospital and Nursing Home was originally built in 1959 by a private act through Claiborne County, Tennessee, in the city of Tazewell. In addition to authorization from the county, the hospital construction was initially aided by Hill-Burton funds. Over the years, the facility has grown with various additions and renovations. These additions were highlighted by the completion of a nursing home in 1998 and a medical office building inclusive of some outpatient services in 2008.

The hospital was overseen by a board of trustees appointed by Claiborne County and chaired by the County Mayor. While Claiborne County held financial responsibility for the facilities, the hospital was solely responsible for all aspects of the operation, including the hospital, nursing home, the Medical Observation Bay (MOB), ambulance services and certain physician practices.

On the financial side, Claiborne County had issued general obligation bonds on behalf of the hospital. Claiborne County looked to the hospital for repayment of the bonds from hospital operations. In the transaction, the County and its 21 commissioners had to get comfortable with the best option for the community, both financially and from a service standpoint.

In addition to Claiborne County, the primary service area included parts of four other contiguous counties in Tennessee and Kentucky. The hospital featured a good medical staff of both primary care and general surgery with rotating specialists from Knoxville. A relatively new School of Osteopathic Medicine at Lincoln Memorial University added physicians in the community, who share time between pure teaching and clinical duties. However, like many rural hospitals across the country, there is still a shortage of local physicians along with the aging of the existing medical staff.

For the fiscal years ended June 30, 2012 and June 30, 2013, the hospital reported EBITDA of $(300,000) and $570,000. The hospital had delayed certain capital expenditures, including a new computer system due to the declining cash flows. In consideration of the financial losses sustained, the hospital did have cash balances to support operation for a limited period of time. However, the County was unwilling to advance additional funds or issue debt on behalf of the hospital.

In discussing long-range solutions, the Claiborne County Hospital Board of Trustees and Claiborne County officials agreed to accept proposals from firms which would assist in the selection and execution of a transaction to sell the county’s interest in the hospital. Ultimately, Elliott Davis Decosimo’s Healthcare Team was selected to lead the transaction process.

Plan of Action

The Elliott Davis Decosimo Healthcare Team began its process by working to gain an understanding of the hospital and the community served. As part of the discussion for the future plans related to the facility, the hospital board and the county agreed on the following priorities for finding the solution for the hospital:

  • Commit to preserve the current inpatient and outpatient hospital services.
  • Commit to increase the number and type of physicians practicing in the county.
  • Commit to continue emergency services including the county-wide ambulance service operated by the hospital.
  • Continue the provision and support of charity care in the community.
  • Keep capital expenditures consistent with the needs of the current facility, both physical plant and equipment needs.
  • Maintain the existing employees of the hospital.

It was also decided that in order to best protect the interest of the county and its citizens, the transaction would be in the form of a long-term lease, allowing the county to terminate the lease in the event that the other party failed to meet its obligations.

Consideration was given to a separate sale of the nursing home which was also based on the premises. There was a line of thinking that envisioned the potential of a greater offer being realized through the sale of the hospital and the nursing home as individual entities. While there was interest expressed by potential buyers in separating the two facilities, the concept was ultimately rejected because of issues in the division of services (i.e. dietary) and licensure issues with the common building components. Issues around separate financing requirements and community understanding also contributed to the decision to keep the hospital and nursing home within a single package sale.

After completing internal due diligence, Elliott Davis Decosimo targeted 18 potential buyers and had interest from 10 prospects through the Request for Proposal package. Ultimately, four companies visited the facility — two regional not-for-profits, one forprofit chain and one smaller for-profit operator. By the conclusion of the proposal process, two responses were received, only one of which was compliant. As a result, negotiations began immediately with the regional not-for-profit system.

Results

During due diligence, the acquirer identified certain capital needs related to operations and the facility, which were resolved through negotiations between the parties. Under State law, the transaction had to be approved by the Attorney General’s office. The Attorney General was specifically interested in:

  • The process
  • The impact on the community
  • The fairness of price
  • The use of proceeds

The transaction closed with all debt being paid, capital requirements being funded and the balance was set up in an escrow. The escrow exists to protect the acquirer from any undisclosed liabilities and to fund the ambulance subsidy. Ultimately, any unclaimed proceeds will be released to Claiborne County over an extended period of time for use in improving healthcare in Claiborne County.

Despite a few bumps in the road en route to the completion of the transaction, the process continued to move forward because of the following keys:

  • A good management team and medical staff – both of which were open and responsive to the needs of its advisors and the acquirer.
  • A board that took seriously its responsibility in evaluating all options and the terms of the sale.
  • A motivated seller (Claiborne County) that was willing to hire and listen to financial and legal advisors knowledgeable in hospital transactions.
  • An acquirer that took the time to understand the hospital operations and the community it served.
  • A process of continuous communications among all parties.

We Can Help!

Elliott Davis Decosimo’s Healthcare Team works to help hospitals, physicians and other healthcare entities evaluate options in the area of acquisition, divestiture and joint ventures by providing due diligence, transaction management, financial insight and strategic analysis.

If your organization is considering a transaction and would like to speak to one of Elliott Davis Decosimo’s healthcare professionals call 866-417-4059.