Health Merger Gets Cool Response : Analysts See No Trend in HCA-American Hospital Deal

The planned merger of Hospital Corp. of America and American Hospital Supply, a union that would create the nation’s largest health-care company, is not likely to spark similar deals even though hospitals have ventured into other fields in response to government pressure to cut medical costs, experts say.

The proposed union of Nashville, Tenn.-based HCA and American Hospital of Evanston, Ill., which had combined revenues of $7.63 billion in 1984, instead has gotten a cool response from Wall Street and fueled industry debate about the merits of acquiring hospital-supply companies, which have been among the first concerns to feel the brunt of new federally imposed hospital cost constraints.

HCA was the most actively traded stock Monday on the New York Stock Exchange, with its shares closing at $43.875, down $2.625, on volume of 1.6 million. American Hospital shares also fell, closing at $34, down $3, on a volume of 632,000.

“I think there is clearly a trend toward like entities coming together,” said Walter L. Weisman, president and chief operating officer of American Medical International, a Beverly Hills-based competitor of HCA. “But I don’t think there is any chance of that HCA deal being replicated.” Most hospital chains, he said, won’t venture outside their basic service business to buy manufacturing or distribution concerns.

Since 1983, the $400-billion-a-year health-care industry has been trimming fat as it attempts to cope with new Medicare regulations that impose ceilings on the amount that the government will pay for hospital care, as well as new corporate health insurance plans that discourage long hospital stays.

Alternative medical providers, such as health maintenance organizations, also have been siphoning business away from hospitals. As a result of those trends, demand for hospital supplies has shrunk.

Owns Insurance Company

Simultaneously, for-profit hospital chains have been diversifying into other businesses to protect their bottom lines.

Like nearly all of its major competitors, HCA owns both a health insurance company--New Century Life Insurance Co., purchased from E. F. Hutton last winter--and health maintenance organizations, with 50,000 members in New Mexico and 675,000 members in Brazil.

Yet the proposed merger, announced Sunday, is considerably different from those kinds of acquisitions. Health-care analysts said the merger was an example of so-called vertical integration, in which a single entity seeks to provide all phases of medicine--from outpatient and acute medical care to drug manufacturing and equipment supply.

Such vertical integration is common in industries as diverse as poultry farming and soft-drink manufacturing, but so far has not caught on in the hospital industry, which has traditionally shied away from manufacturing.

“It’s hard to rationalize this transaction at first blush,” said Joel Liffman, a health-care analyst at Drexel Burnham Lambert in New York.

“Other types of hospital diversification moves, such as health insurance companies or HMOs, all have the potential to generate revenues coming through the front door in the form of additional patients. This only addresses the cost of running a hospital, and I’m not so sure where the benefit is to either company,” he said.

The two companies said the proposed merger would allow them to provide more efficient care. It would link 421 health-care facilities owned or managed by HCA in the United States and overseas with American Hospital, which makes or distributes 130,000 medical products, and thereby achieve economies of scale few competitors could match, officials said.

The possible effect on consumers stemming from such a union is unknown at this point, although HCA says it expects the merger to significantly cut its $800-million annual tab for hospital supplies.

“Vertical integration, as opposed to horizontal integration, lets us control the cost side of the equation,” said HCA President Thomas F. Frist Jr. “Besides that, it will quite likely broaden our base and strengthen our balance sheets. We are a growth company and, together, we can grow as well or better than we could (operating) separately.”

Frist also indicated that the two companies would be looking beyond the immediate economies of scale toward acquisition candidates, such as nursing homes, alternative delivery systems and perhaps even a drug company. He added that the new company might consider further expansion into international markets.

“We are taking the cash flow that they (American) could not really invest in their primary business and using it to grow in other areas,” Frist said.

Although the $15-billion-a-year hospital-supply industry suffered one of its worst years in 1984, American Hospital fared better than competitors largely because it does most of its business under long-term contracts that commit large groups of hospitals to volume purchases.

What’s more, it supplements that business by offering home health-care supplies to the burgeoning outpatient market.

Those moves helped the company end 1984 with its 31st consecutive year of higher sales--$3.4 billion. Net earnings rose 12% to $238 million.

Senior officials of American Hospital Supply could not be reached for comment on the merger, which was unanimously approved by the boards of both companies last week.

The deal is, however, still subject to shareholders’ approval, and a Justice Department spokeswoman said that agency or the Federal Trade Commission would probably review the merger to gauge its possible effect on competition.

Under terms of the merger agreement, no cash would be exchanged. Instead, each share of American Hospital Supply stock would be exchanged for three-fourths of a share in a new holding company, which has not yet been named.

Holders of HCA’s 88.1 million shares outstanding would receive a full share in the new company. The new holding company will have 145 million shares outstanding, with a value of $6.6 billion, based on current market prices.

Creating a Health-Care Giant If approved, the merger os Hospital Corp. of America and American Hospital Supply would create the nation’s largest health-care company. The companies had combined revenues in 1984 of $7.63 billion. American Hospital Supply

Evanston, Ill.-based American Hospital makes and distributes about 130,000 health-care products. Its hospital group distributes supplies and makes disposable medical and surgical products. The laboratory group makes blood-typing serums, laboratory controls, specialty glassware, diagnostic reagents and instruments. The medical specialties operation makes medical devices, instruments and equipment.

1984 1983 Revenues $3.45 $3.31 Billion Billion Net $238 $212 Income Million Million Net Per Share $3.23 $2.86

Hospital Corp. of America

Nashville, Tenn.-based Hospital Corp of America is the largest for-profit hospital company in the United States, where it owns 178 acute-care hospitals and 28 psychiatric hospitals and manages 188 units. Overseas it owns 25 hospitals and manages 2 others. The company has 60,000 beds worldwide.

1984 1983 Revenues $4.18 $3.2 Billion Billion Net $297 243 Income million million Net Per Share $3.35 $2.80