Health Management Associates, Inc.

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Health Management Associates, Inc.

5811 Pelican Bay, Suite 500
Naples, Florida 34108-2710
U.S.A.
Telephone: (239) 598-3131
Fax: (239) 598-2705
Web site: http://www.hma-corp.com

Public Company
Incorporated: 1977 as Hospital Management Associates, Inc.
Employees: 23,000
Sales: $2.3 billion (2002)
Stock Exchanges: New York
Ticker Symbol: HMA
NAIC: 622110 General Medical and Surgical Hospitals

Health Management Associates, Inc. is a highly successful operator of more than 40 general acute care hospitals and two psychiatric-only hospitals. The facilities are located in what management calls “non-urban” communities, with populations between 30,000 and 400,000, primarily in the southeastern and southwestern United States. HMA operates the only hospital in most of its markets, granting it greater leverage in negotiating prices with health providers. For nearly 20 years, HMA has been successful in acquiring small hospitals, generally 100 to 300-bed facilities, at reasonable prices. The company then invests money to significantly upgrade the institution, prompting area residents to turn to the local hospital rather than travel to a larger facility in a bigger city. Moreover HMA is proficient at instituting popular hospital management practices, such as ensuring that the first person a patient meets is a nurse. While the hospitals take advantage of HMA’s size when it comes to buying power and operating systems, they are essentially managed at the local level. The company maintains a lean headquarters in Naples, Florida.

Late 1970s Origins

HMA, which was originally called Hospital Management Associates, Inc., was formed in 1977 in Naples, Florida, by Joseph Greene. He was helped in running the hospital management company by his brother Charles, while his son, Joseph Greene, Jr., headed the company’s Florida hospitals. The original plan was to manage hospitals throughout the country, but the company had difficulty competing in urban areas like Atlanta, resulting in a steady erosion in profits. Hospital Management Associates became Health Management Associates in 1979, but the change in name did nothing to correct the company’s dwindling fortunes, and by 1983 HMA was in desperate need of an infusion of fresh cash. Enlisted to help was a Naples resident, William J. Schroen, a semi-retired executive with strong Wall Street credentials and experience in turnarounds, albeit in the beer industry. Approached by a First Chicago venture capital banker named Kent Dauten, Schoen agreed to join HMA’s board of directors to both raise money and help work a turnaround.

Schoen earned a degree from the University of Southern California but received a practical education working for Pierce Glass, a subsidiary of Indian Head, Inc., which in turn was a spinoff of Textron, the first modern conglomerate founded by the legendary Royal Little. Schoen served as president of Pierce from 1971 to 1973, forging a solid reputation by moving the company into specialty packing that resulted in a significant improvement in sales. He then spent the next several years in New York City turning around F&M Schaefer Corporation, managing to prosper by making Schaefer the premium beer in Puerto Rico. Schoen was in his mid-40s when he sold Schaefer to Stroh Brewery Co. and moved to Naples, where in semi-retirement he started up a small bank, Commerce National Bank.

When Schoen was elected to the board of directors in February 1983, HMA had reported a meager profit of $251,000 on revenues of $25 million in its latest annual results. Serving initially as a consultant to the company, he was soon named president and chief operating officer in December 1983 despite his lack of knowledge of the health care field. Over the course of two years, he helped shift the company’s focus to non-urban hospitals and brought in $7 million in outside investments, which led to Schoen being named co-CEO with Greene in December 1985. According to Florida Trend, “In no time, Schoen was butting heads with co-Chief Executive Joseph Greene, who wanted to keep control totally centralized.” Within months, in April 1986, Greene retired, leaving Schoen HMA’s sole CEO.

New Leadership in the 1980s

Free now to make changes that he deemed necessary, Schoen divested ten of HMA’s dozen hospitals, all deep in debt and losing money, and retained only two facilities. He swore off urban hospitals and began to carve out a healthcare niche by focusing on the acquisition of smaller nonprofit hospitals in southern cities with populations under 75,000 and no local competition. Moreover, he slashed the head count at corporate headquarters, terminating 50 of 82 managers and executives as part of an effort to decentralize the operation. He then established competitive performance goals, developed a profit plan for each hospital, and instituted regular evaluations. The rankings of all the hospitals were shared throughout the chain. By the end of 1986, HMA added three hospitals to the fold, leasing hospitals in Biloxi, Mississippi, and Marathon, Florida, and buying another in Louisbourgh, North Carolina. To help support this expansion, Schoen took HMA public at $10 per share in 1986. However, even though the company went on to post solid results, the price of its stock languished, tainted by the problems of other hospital chains of comparable size. American Healthcare Management and Westworld Community Healthcare filed for bankruptcy, while National Healthcare defaulted on some $100 million as part of a restructuring. HMA added three more hospitals in 1987, leasing a facility in Van Buren, Arkansas, and buying hospitals in Durant, Oklahoma, and Hamlet, North Carolina. Another hospital, located in Gaffney, South Carolina, was purchased in March 1988. At this point, Schoen believed that HMA was severely undervalued by Wall Street, and he mounted a drive to take the business private once again, enlisting the help of board members from First Chicago and Prudential Ventures. In August 1988, a management-led investment group paid $14.75 for each share of stock, nearly $85 million in all, and removed HMA and its chain of a dozen hospitals from public ownership. Just as important, the company took on no debt to finance the buyout.

By now, the HMA model for acquiring hospitals and integrating them into the chain was well established. First, management targeted financially troubled non-profit medical facilities located in small markets that could be bought well below the industry standard. In this regard, Schoen was able to take advantage of changes in the health care industry. With the federal government instituting tighter controls on Medicare payments in the early 1980s, moving toward fixed prices, a number of inefficiently run, smaller hospitals, were put up for sale in a market with few buyers. As a result, facilities that just a few years earlier had fetched as much as $250,000 a bed to acquire now cost in the range of $150,000 per bed. In contrast to more experienced health care executives, Schoen actually saw fixed prices as a guaranteed profit, provided that HMA cut costs below the Medicare rate. Part of those savings were the result of group purchasing, a process that became highly organized and progressively easier to apply to new hospitals in the system. HMA was also successful in using computers to speed up bill collections, and even saved money by buying used equipment that technicians beefed up on the cheap. HMA was able to shave off a considerable amount of time needed to collect bills, just 49 days, compared to the industry standard of 75 days. Aside from organizational changes, HMA made efforts to earn the good will of residents, who were naturally skeptical about an outside company taking over a local institution.

HMA acquisitions were upgraded, which involved remodeling as well as the purchase of new equipment, and specialists were recruited at great cost. The expansion of services and the availability of specialized equipment paid off in a number of ways for HMA. Not only did these additions generate greater revenues, they persuaded residents that they did not need to travel 50 miles to a big city hospital. To keep the economics in line, HMA rotated the most expensive equipment among its hospitals on a set schedule. Another effective step that HMA took with a new acquisition was to simply survey patients and address basic concerns. The hospital and its new management also sought to be good corporate citizens, sponsoring local events and offering cafeteria discounts to senior citizens, a key constituency. One popular program that HMA developed was Med-Key, a plastic identification card that contained basic information about a resident, the use of which cut down on the amount of time people had to spend on completing medical forms when visiting the local hospital. As an inducement to use Med-Key, residents also received discounts from participating merchants.

In January 1989, HMA purchased an Orlando psychiatric hospital and a year later added the second of the company’s two psychiatric hospitals by acquiring a Tesquesta, Florida, facility. With HMA thriving, posting a string of increasing profitable quarters, Schoen now deemed it advantageous to once again take HMA public. In February 1991, the company conducted an offering priced at $16 per share. The years HMA spent as a private concern proved advantageous to its backers, who made handsome returns on their investments as the company’s value virtually doubled.

Acquisitions in the 1990s

In the early 1990s, HMA continued to add to its holdings at a steady pace. In 1991, it bought 281-bed Riverview Regional Medical Center, located in Gadsden, Alabama, the company’s largest facility to date. In 1993, HMA acquired hospitals in Greater Haines City, Florida, and Natchez, Mississippi. The company added one hospital in 1994, the Charlotte Regional Medical Center, located in Punta Gorda, Florida. Starting in the winter of 1993, there was a run-up on the price of HMA stock, prompting a 3-for-2 split in June 1994, at which point the price fell precipitously, perhaps caused by the large amount of shares unloaded by insiders in recent months and a June 1994 Forbes article that expressed skepticism about the company’s rationale that executives were merely diversifying their personal portfolios, the writer commenting, “Maybe so, but we suspect the bloom is off this one.” Regardless of the reasons for the loss of investor confidence, HMA attempted to address the problem by announcing a major stock buyback program, the board authorizing the purchase of 2.5 million shares.

Company Perspectives:

Health Management Associates, Inc. is the premier operator of acute care hospitals in the southeast and southwest areas of non-urban America.

The price of HMA stock soon rebounded as the underlying financial strength of the company ultimately overcame investor doubts, and Schoen and his team were able to return their focus to growing the business. In 1995, they added two hospitals, one in Hartsville, South Carolina, and another in Statesboro, Georgia. A year later facilities in Clarksdale, Mississippi, and Midwest City, Oklahoma, were acquired. HMA added three hospitals to its system in 1997, agreeing to manage a hospital in Anniston, Alabama, leasing one in Brandon, Mississippi, and buying yet another in Little Rock, Arkansas, a market larger than the norm for the company.

In late 1996, Schoen brought in a new executive, Joseph V. Vumbacco, with the goal of grooming him to one day succeed him as HMA’s CEO. While Schoen headed Schaefer in the 1970s, Vumbacco served as its senior vice-president, secretary, and general counsel following a stint as an attorney with a New York law firm. He came to HMA after being employed for 14 years with a construction and real estate firm, The Turner Corporation, where he served as an executive vice-president. In April 1997, he was named HMA’s president as well as chief administrative Officer and chief operating officer.

HMA picked up the acquisition pace in 1998, adding five hospitals to the chain, leasing facilities in Brooksville, Florida, and Spring Hill, Florida, and buying two hospitals in Flowood and another in Meridian, Mississippi. In 1999, HMA arranged to lease two more hospitals, located in Jackson, Mississippi, and Key West, Florida, and bought a third in Lancaster, Pennsylvania. The move into Lancaster was out of character for HMA because the city had two other larger hospitals. Nevertheless, Schoen felt confident that once HMA instituted changes it would become the hospital of choice in the community. A year later, HMA significantly increased its marketshare in Lancaster by acquiring St. Joseph Hospital, a 268-bed acute care hospital. Also in 2000, HMA added hospitals in Dade City, Florida, and Statesville, North Carolina.

The 2000s and Beyond

In January 2001, Schoen, at 65 years of age, stepped down as CEO in favor of Vumbacco, some ten years younger, although he stayed on as chairman. In truth, it was more a change in titles than workloads, because two years earlier Schoen had stepped back from the day-to-day operations of the company. The company was well positioned for the change, its finances so strong that later in 2001 HMA was added to the S&P 500 Index, joining the ranks of other notable large-capitalization stocks. HMA faced competition from two Tennessee-based companies, Community Health Systems, operating 57 hospitals, and Providence Healthcare with 19 hospitals, but the future continued to look bright for HMA. For the past decade the company achieved an eight-fold increase in revenues, which total $2.26 billion in fiscal 2002, with net income of $246.4. There also appeared to be plenty of hospitals in America’s heartland that management might acquire to fuel further growth. Moreover, the greying of America bade well for HMA’s future. While 97 million American were over the age of 45 in 2000, the number was estimated to increase to 120 million by 2020. Already HMA was preparing for that time, making considerable investments in specialty cardiac and MRI units. In addition, another trend favored the company’s prospects: an increasing number of aging Americans were opting to live in the kind of non-urban markets in which HMA specialized.