Lecture 15 Case Study Submission

Do Case 31 Spreadsheet with Questions please

you can use this stuff below to help you with the questions

CASE

31

ST. BENEDICTS TEACHING HOSPITAL

MERGER ANALYSIS

THE PATIENT BASE of Lafayette County, Indiana, is currently served by three hospitals: (1) St. Benedicts Teaching Hospital, a not-for-profit, university-related hospital with 525 beds; (2) Wabash Regional Medical Center, a 250-bed, for-profit hospital owned by Hospital Associates of America (HAA), a national chain; and (3) Lafayette General, a 400-bed, not-for-profit, acute care hospital owned by Hoosier Healthcare. St. Benedicts and Lafayette General are located less than one mile from one another, while Wabash Regional is about five miles away from St. Benedicts, in a newer and more rapidly developing section of the county.

The service area has a total of 1,175 licensed beds, or about 3.5 beds per 1,000 population, which is higher than the national average of about 2.4 beds per 1,000 and much higher than the roughly 2 beds per 1,000 needed under an aggressive utilization management program. Of course, as a tertiary care facility, St. Benedicts receives patients from throughout the state, but the bulk of its patients still come from the local five-county area.

With an excess of hospital beds in the service area, the status quo may not survive the changing healthcare environment. Indeed, Lafayette General has had some tough years recently, as evidenced by its number of discharges, which have fallen to 11,412 in 2021 from 12,055 in 2020 and 12,824 in 2019. In addition, HAA has been aggressive in building market share in other areas of Indiana through both acquisitions and hospital expansions. With these factors in place, some consolidation in the local hospital market will likely take place, and the most likely result is the acquisition of Lafayette General by either St. Benedicts or HAA.

Lafayette General operated as a county hospital for more than 50 years and hence developed a reputation for providing healthcare services to low-income residents. After many years of operating losses, the county concluded that it could no longer afford to operate the hospital. In 1987, the county sold the hospital for $1 to Hoosier Healthcare, a not-for-profit managed care organization and provider, which by 2021 had become the states largest integrated healthcare company.

Hoosier Healthcares major business line is managed care. Its numerous plans, including health maintenance organization, preferred provider organization, point of service, and Medicare and Medicaid plans, serve more than 1 million members in 25 Indiana counties, encompassing all the states major metropolitan areas. In addition to managed care plans, Hoosier Healthcare owns seven different providers: two acute care hospitals (including Lafayette General), one rehabilitation hospital, one mental health facility, one hospice, one home health care agency, and one retirement community.

Lafayette General is the flagship of Hoosier Healthcares provider network, and the company has kept the hospital in excellent condition in spite of falling inpatient utilization. In fact, Lafayette General recently built the state-of-the-art HeartCare Center and the modern MaternityCare Center. Furthermore, Lafayette General operates a full-service emergency department and a medical helicopter service.

In response to the current situation, St. Benedicts has formed a special committee to consider the feasibility of making an offer to Hoosier Healthcare to acquire Lafayette General. The committees primary goals are as follows:

To place a dollar value on Lafayette Generals equity (fund) capital, assuming that the hospital will be acquired and operated by St. Benedicts

To develop a financing plan for the acquisition

In addition, the committee has been asked to consider two other issues related to the potential acquisition:

What is the best organizational structure for a combined enterprise? Currently, both Lafayette General and St. Benedicts have separate boards of directors and management staffs. Of course, currently the senior members of the Lafayette General board are also Hoosier Healthcare officers.

Should the medical staffs of the two hospitals be integrated, and, if so, in what way? The medical staff of Lafayette General consists of local physicians, including many family practice physicians, whereas the medical staff at St. Benedicts is almost entirely made up of specialists, and all are members of the local universitys college of medicine with responsibilities that go well beyond clinical practice.

A new committee will be formed to finalize recommendations on these issues should St. Benedicts management agree to move forward with the acquisition offer, but some preliminary judgments are needed at this time. As a starting point in the valuation analysis, the committee has obtained historical income statement and balance sheet data on both hospitals. Exhibit 31.1 contains the data for Lafayette General, and exhibit 31.2 provides the data for St. Benedicts. Both sets of statements are abbreviated but contain the data considered to be most relevant to the analysis. In addition, relevant comparative data are presented in exhibit 31.3 and relevant market data are shown in exhibit 31.4. (Assume that the data in exhibits 31.3 and 31.4 reflect late-2021 conditions.)

EXHIBIT 31.1 Lafayette General: Historical Financial Statements (in Millions of Dollars)

EXHIBIT 31.2 St. Benedicts Teaching Hospital: Historical Financial Statements (in Millions of Dollars)

EXHIBIT 31.3 Selected Comparative Data

EXHIBIT 31.4 Selected Market and Hospital Data

One of the toughest tasks that the committee faces is the development of Lafayette Generals pro forma (forecasted) cash flow statements, which form the basis of the discounted cash flow valuation. Several basic questions must be answered before any numbers can be generated. First, what synergies, if any, can be realized from the merger, and how long will it take for such synergies to develop? For example, can duplications be eliminated? Both hospitals have mercy flight helicopters and offer full emergency department services, even though the two hospitals are only one mile apart. What is the impact of such operational changes on revenues and costs and hence on the net cash flows that Lafayette Generals assets can produce? Second, once the consolidation takes place and all synergies have been realized, what is the long-term growth prospect for Lafayette Generals cash flows? Third, what impact would the acquisition have on St. Benedicts own cash flows? Any change in St. Benedicts revenues or costs that results from the acquisition must be included in the analysis. The answers to these questions and others form the basis for the pro forma cash flow statements.

You are the chair of the special committee formed at St. Benedicts to evaluate the potential acquisition. You must present your findings and recommendations to the hospitals board of directors. Because the case contains far less information than normally available in a merger analysis, especially when the potential merger is friendly, you must make many difficult assumptions to complete your analysis. Although you do not know much about Lafayette Generals local market, you do know the current trends in the healthcare industry. Use this knowledge to help make judgments about the case. The quality of many, if not most, real-world financial analyses depends more on the validity of the underlying assumptions than on the theoretical correctness of the analytical techniques.

Note that there is no preferred solution to this case, so your case analysis will be judged as much on the assumptions used in the analysis as on the analysis itself. Finally, remember that numerous risk analysis techniques are available that can be used to give decision makers some feel for the risks involved.