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Morningstar | HCA Announces Agreement to Purchase North Carolina's Mission Health for $1.5 Billion

After its initial letter of intent was disclosed in March, HCA Healthcare announced a definitive agreement to acquire North Carolina's Mission Health system on Aug. 31. With a price tag of nearly $1.5 billion, the transaction marks one of the largest single deals in HCA's recent history. HCA gains seven facilities with nearly 1,000 combined beds, while establishing a new foothold in North Carolina. Given Mission Health's non-profit status, the transaction is particularly unique and will be subject to approval by the state's attorney general's office. Additionally, the $1.5 billion payment will be contributed to the newly formed Dogwood Health Trust, a non-profit organization that will be dedicated as a resource to improve the health of communities in western North Carolina.

On the surface, the acquisition appears to run counter to our prevailing thesis underpinning HCA's narrow moat--Mission is a rural provider, in a state new to HCA, with a patient mix that skews heavily toward Medicare, Medicaid, and uninsured populations. That said, we think the uniqueness of Mission's competitive position makes it a prime candidate to see improved operational efficiency under HCA's ownership. Mission boasts roughly 50% market share of the counties in which it operates and is the largest single employer in the area. Until 2016, it was governed under a certificate of public advantage granted to it in the 1990s that sanctioned its combination with St. Joseph's Hospital in 1998, its neighboring competitor in Asheville, North Carolina. The agreement required Mission to operate under margin, cost per case, and employment caps that limited its ability to benefit from its market power. Now free from these restrictions, its acquisition gives HCA an immediately dominant presence in the area. We expect the Mission system to benefit from HCA's cost advantages in procurement, while also seeing stepped up investment from a for-profit parent organization with much deeper pockets.

As part of the deal, HCA intends to spend an incremental $430 million in capital expenditures over the coming five years to complete ongoing construction while building a replacement medical center and a new behavioral health facility. HCA also provided additional assurances to the state that we think, along with its lengthy due diligence process, make the deal more likely to be approved. HCA pledged to maintain ownership and keep open all acquired rehabilitation and acute care hospitals for a minimum of 10 years, while also forming a $50 million innovation fund to invest in area businesses.

Finally, while the demographic profile of a rural providers' patient population typically makes a structural competitive advantage difficult to build, in our view, Mission appears to be a bit different. Located only a few hours outside of Charlotte, Asheville has actually seen population growth of 1.5%-2.0% in the last few years, counter to the declines seen in many other rural areas. That said, Mission's characteristically rural payer mix is one negative aspect that gives us pause. With 75% of admissions historically Medicare, Medicaid, or uninsured patients, the case for meaningful pricing upside following the transaction appears limited.