University Hospital-Piedmont merger good deal despite 'volatile' health care industry

University Hospital's proposed merger with Piedmont Healthcare is a good deal for the Augusta community even as a "very volatile" health care environment with the ongoing COVID-19 pandemic impacts University's value and prospects moving forward, independent analysts said.

The Georgia Attorney General's Office held a public hearing Tuesday at University as required by the state's hospital acquisition law but no one came forward to speak against the proposed deal. In fact, all of the speakers were strongly in favor of moving forward.

Piedmont "couldn't be prouder of being selected" by University for the merger, said CEO Kevin Brown. "Culture drives everything from an organizational perspective, but also who you want to be partners ... We’re both about quality, we’re both about safety, we’re both about efficiency."

Back as far as 2012, when the Affordable Care Act and other factors began to have an impact on the health care market, University's board began evaluating whether it could continue to stay independent and provide the same level of services into the future, chairman Hugh Hamilton said.

University was experiencing the same as other health care providers in being "asked to do more with less" in terms of flat or declining payments, said Anu Singh of Kaufman Hall Consulting, who advised University on the process. In addition to those factors, University's main building is 50 years old and, while well-maintained, needs major improvements. The health care system as a whole needs access to a large amount of capital, University CEO Jim Davis said.

University has a Facility Master Plan that involves adding three floors to its Heart and Vascular Institute that includes a consolidated Intensive Care Unit, major infrastructure upgrades and room renovations, Davis said.

Piedmont is providing at least $990 million in capital over 10 years as well as a major upgrade ofUniversity's information systems, said Michael Mandl, executive vice president of Piedmont.

"I will tell you, without this relationship with Piedmont, it is highly unlikely that University could fund all of this necessary work on its own," Davis said.

Piedmont is keeping on University's employees for at least 18 months at essentially the same salary and has guaranteed to maintain the same services for at least five years and core services for at least 10 years, Mandl said. That should be reassuring for the employees, Davis said.

"The name on your badge is going to change," he said, at one point referencing "Piedmont Augusta" although a new name has not been selected. "But I think the day-to-day work will be the same." 

Piedmont is the state's largest health care system with 16 hospitals, 55 urgent care centers and numerous clinics, and Augusta would serve as its eastern hub for the state, Mandl said.

More:University-Piedmont merger worth more than $1 billion to Augusta, report says

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But the deal has to make sense for the community as a whole, which is why Stroudwater Associates was hired as an independent analyst to do a Fair Market assessment of the deal. The attorney general's office hired Ernst & Young to do a review of that analysis and the economics of the deal.

Stroudwater looked at a number of different ways of gauging University's value, from its assets to its future income to what similar organizations were worth in deals going back 10 years, said Opal Greenway, a principal with the group. But that initial evaluation was done over the summer and referenced projections as of June 30, and the ongoing pandemic forced the group to come back and re-evaluate its assessment based on what University was seeing in September, she said. 

"There is no back to normal," she said. "We're not going to get back to 2019," before the pandemic hit.

That re-evaluation, which included increased competition for staffing and rising inflation, caused it to lower University's value by about -12% or $40 million Greenway said. The organization's value ranges from $277 million to $338.6 million, according to Stroudwater. 

University is "a very valuable organization on its own," Greenway said. But the value of the deal for the community, which includes keeping University's commitment to indigent care, local control and to supporting community needs, is around $1.4 billion, she said.

Ernst & Young, using some of its own market research as well as evaluating the Stroudwater analysis, pegged University's value at between $668 million and $722 million, said Natasha Hunerlach, a partner in strategy and transactions. That figure was also lower than one originally projected in June based on more recent numbers from September and a "very volatile industry environment," she said. "Those projections are not necessarily achievable any more." The capital commitment must also be discounted some because it plays out over 10 years, Hunerlach said.

Still, she valued the deal for the community at $767 million, a lower estimate based in part on a lesser value assigned to some of the merger's benefits due to their incremental nature. 

But "you gain benefit that wouldn't exist without this transaction," Hunerlach said.

It wasn't an easy decision to move forward on a deal but University's physicians and employees know it was the best move going forward with Piedmont, said Dr. Mac Bowman, who also serves as vice chair of the Richmond County Hospital Authority that actually owns University's assets and leases them to University.

The alliance "will cement high quality, exquisitely proportioned health care in this community for decades to come," he said. "It was done for the right reasons, by the right people, in just the right way.