Dive Brief:
- Private equity-owned hospital operator Quorum Health plans to transition to nonprofit status this year through a deal with Healthside Partners.
- The definitive agreement announced Thursday is meant to help put Quorum, which has struggled to recover following its bankruptcy in 2020, on more stable financial footing through access to the tax and funding benefits nonprofit hospitals receive.
- The deal appears to be structured as straight asset transfer, wherein the nonprofit system Healthside will acquire Quorum’s assets without inheriting its liabilities and obligations. Quorum will remain a separate company that will then be dissolved, a spokesperson for the system said. The transition is expected to close this fall.
Dive Insight:
It’s the latest makeover for Quorum, which was formed in 2016 as a spinoff from for-profit operator Community Health Systems. Originally, Quorum was a publicly traded company with 38 hospitals across 16 states.
But the system, which focuses on rural and mid-size markets in the South and West, struggled to stand on its own in the challenging environment facing rural operators. Quorum eventually filed for bankruptcy in 2020, and has since shrunk to 11 hospitals in nine states.
Transitioning to a nonprofit will unlock a suite of financial benefits for Quorum, including tax-exempt funding and easier access to philanthropic support, the system said in its press release. Quorum estimates it’ll save $13 million each year from the tax breaks alone.
In addition, as a nonprofit, Quorum can participate in the 340B drug discount program, allowing the system to purchase drugs at significant savings. Quorum projects 340B will generate more than $11 million for the company annually.
“The reality is that our industry is constantly facing growing financial, operational, and regulatory pressures. It is becoming increasingly challenging to deliver care and support a strong workforce without pursuing strategic solutions,” Quorum CEO Chris Harrison said in a statement.
“By becoming a nonprofit, we are strengthening our ability to serve rural communities that rely heavily on government-sponsored programs,” Harrison added.
Nonprofit hospitals have faced significant criticism for behaving like profit-maximizing businesses while enjoying tax exemptions. Watchdogs, lawmakers, researchers and reporters have found numerous examples of the companies skirting charity care requirements and misusing tax-exempt funding, despite their obligations to deliver community or charity care to low-income patients.
In its release, Quorum argued that becoming a nonprofit will allow it to expand charity care programs, while keeping the doors of its hospitals open and retaining its workforce. Moreover, the deal includes more than $300 million in planned capital investments, including outpatient expansions and facility upgrades, over the next few years, according to the release.
The Quorum spokesperson declined to comment on whether that tranche was a commitment from Healthside.
With the transition, Quorum is saying adieu to the investor-based PE model, which has bolstered the system even before its bankruptcy. When Quorum went bankrupt, the company’s largest debt holder was private equity firm KKR, which holds numerous healthcare investments.
Two other debt holders, PE firms Davidson Kempner Capital Management and Goldentree Asset Management, established control of the company after the bankruptcy. Now, Goldentree owns the majority stake.
PE firms have snapped up hundreds of hospitals and thousands of physician practices over the past decade, typically with the hopes of selling them within a few years for profit. That activity has generated wealth for investors — and concern among lawmakers, academics, providers and patient advocates, given research showing that PE-owned providers can lead to poorer patient outcomes and higher costs for care.
Practices themselves often struggle as well. There have been a number of recent bankruptcies tied to PE ownership, including multistate health systems Steward Health Care and Prospect Medical Holdings.
Since its own bankruptcy, Quorum has attempted to right-size its hospital portfolio through various sales and acquisitions, while pursuing growth in operations and support services. The company launched a business last year focusing on IT and billing support for rural hospitals, after acquiring a number of service contracts from bankrupt Steward.
Despite years of restructuring, Quorum remains at risk for default, according to Moody’s Investor Service. The credit ratings agency has assigned Quorum a “Ca” rating, the second lowest possible, citing the system’s concentration in just a few markets and its exposure to Medicaid, a program facing looming cuts under the GOP’s Big Beautiful Bill set to slam U.S. hospitals.
