Hospital Corp. of America, the nation's largest for-profit hospital chain, has agreed to acquire American Hospital Supply Corp., the nation's largest provider of hospital supplies, both companies announced yesterday.
The merger of the companies, if it is approved by stockholders, would create a giant health-care conglomerate with assets of nearly $7 billion, making this one of the biggest mergers outside the oil industry. The deal has already been unanimously approved by directors of both companies.
The merger reflects the changing economics of the health-care field, where changing Medicare regulations have brought about reimbursement procedures that are based on a fixed-fee schedule, and employer-provided insurance programs have discouraged long hospital stays. The economies of scale, or cost savings, in this merger will give the new company a tremendous advantage over the other leaders in the field, perhaps leading to other mergers in the near future.
Hospital Corp. Chairman Thomas F. Frist said the economies of scale from the merger will make the company better able to compete effectively in the industry.
Under terms of the merger agreement, each share of American Hospital Supply stock will be worth three-quarters of a share in the new company, while each share of Hospital Corp. stock will be worth one share. No cash will be exchanged.
Hospital Corp., founded in Nashville in 1968, owns and manages more than 420 hospitals and other facilities throughout the world. American Hospital Supply, based in Evanston, Ill., manufactures and distributes more than 130,000 medical products to hospitals, laboratories and other health-care providers.
Hospital Corp.'s success has resulted in part from its ability to buy "Band-aids by the boxcar." By purchasing the supplies it needs in large quantities at bargain prices, the company has been able to carve out an enviable niche in the industry. The acquisition of American Hospital Supply fits Hospital Corp.'s overall strategy, since it will enable the chain to further hold down costs.
The headquarters of the new company will be in Nashville, but American Hospital Supply is expected to keep its Evanston offices. American Hospital Supply Chairman Karl D. Bays will be chairman of the new company, and Frist will be president of the combined entity.
The combined earnings of the new company, based on 1984 results, total about $530 million.
Hospital Corp. alone had revenues of $4.1 billion and earnings of $297 million. The company has developed extensive relationships with university hospitals and is the leading manager of non-profit hospitals in the country. It is, for example, currently working jointly with Vanderbilt University to develop a new hospital in Nashville.
Hospital Corp., along with National Medical Enterprises and Humana, the other leading for-profit hospital management chains, has been accused by some of "skimming the cream," concentrating mainly on those patients who have private insurance to pay their bills. The company has tried to defend itself, but the industry has continued to face hostility for rejecting some indigent patients who asked for treatment but are sent to other hospitals.
Hospital Corp. and National Medical Enterprises along with American Medical International Inc. were the three chains preparing bids last month to take over George Washington University Hospital.