Of the three U.S. companies that own hospitals under a for-profit and nonprofit joint venture, two are making their first forays into New Jersey, and it's no coincidence, as the heads of both companies say the Garden State is the right type of market for a joint venture's capital, consolidated management and focus on charity care.

The deal that's garnered the most attention is the venture between Hackensack University Medical Center and LHP Hospital Group to reopen the former Pascack Valley Hospital, in Westwood, under the Hackensack brand. LHP and Hackensack also are partnering to take over the license for Mountainside Hospital, in Montclair.

But it's St. Louis-based Ascension Health Care Network — a joint venture between Ascension Health Alliance, parent company of Catholic nonprofit Ascension Health, and private equity firm Oak Hill Capital Partners — that may make a bigger splash in the Garden State; it's negotiating exclusively to acquire seven Catholic hospitals in New Jersey — the four hospitals in the St. Clare's Health System; two hospitals operated by St. Joseph's Healthcare System; and St. Mary's Hospital, in Passaic.

Ascension Network CEO Leo P. Brideau said health care in New Jersey is fragmented, especially in North Jersey, which makes the state attractive to joint ventures, and gives them "the opportunity to shape a health system … without having to break things."

He said the state's dense population — and Catholic population — also makes sense for the company to dive into the market.

For Plano, Texas-based LHP, having AtlantiCare president-emeritus George Lynn on the board from the beginning gave the company ties to New Jersey — and insight into the state regulatory system. Its CEO, Dan Moen, also said having Chris Christie in the governor's office has opened up the state, with a "willingness for private companies to invest in New Jersey."

"It's one of the slower states to open the door to private hospital ownership," Moen said. "I don't necessarily think the floodgates are open, but I do think others see it as an opportunity for them, as well."

The third joint-venture company, Tennessee-based Duke LifePoint HealthCare, a venture between Duke University Health System and LifePoint Hospitals, doesn't have plans for the Northeast, a spokeswoman said.

"You can either merge into another system and forfeit your identity and relationship with your community, or you can sell and the same thing happens," said Lynn, who twice served as chairman of the American Hospital Association board. "In LHP's model, you can partner and retain that community relationship."

The hospitals also get to take advantage of greater scale for purchasing agreements and negotiating reimbursement contracts. That, along with improved efficiency and management changes, helps offset the new expense of paying taxes. Brideau said it takes about five years to see almost all the financial improvement that comes with such a move, "based on the experience we've had with hospitals within Ascension Health."

Arrangements such as these also can help improve access to capital — a major issue for nonprofit hospitals in New Jersey, where margins historically have been small. But barriers still exist for joint-venture ownership groups to enter the Garden State market.

Lynn said he had to remind Moen to remain patient throughout the regulatory process surrounding Pascack Valley Hospital, which has been dragged out by a four-year legal battle with neighboring Valley Hospital and Englewood Hospital and Medical Center. Like other hospital transactions, joint ventures must obtain a certificate of need from the Health Department and receive approval from the attorney general under the Community Health Assets Protection Act.

Stephen Timoni, an attorney with K&L Gates, in Newark, said when he helps health care organizations structure joint ventures, he helps them navigate the complex legal issues of the deals.

"Both fraud and abuse rules have to be complied with, as well as certain Internal Revenue Service rules, in order for the hospital to maintain its tax exemption," Timoni said. "The transaction that Hackensack has done … needs to be structured in a way that Hackensack University Medical Center's tax exemption is not jeopardized, and I'm sure they've been through all of those rules. Hospitals have to provide a certain amount of control in a joint venture, and so forth.

"The regulatory landscape is very complex," Timoni added. "And then you have the business issues that need to be worked out."

Brideau said he also found the state's regulatory process burdensome, but the preconceived notion that for-profit ownership is a cause for concern also presented a roadblock. "When you use Catholic and for-profit in the same sentence, people do a double take," he said. "What we discovered, and has been confirmed, is that the tax status is not a barrier to these hospitals remaining Catholic."

Despite the concerns, both Moen and Brideau said New Jersey hospitals are ready for a new type of ownership model.

"It's a model that isn't perfect for everyone, but works well in many markets — and I think New Jersey is proving to be good for both the nonprofits as well as LHP," he said.

E-mail to: mcaliendo@njbiz.com
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