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March 3, 2015

Did this hedge fund leader invest in your hospital? Here's how he decides.

Daily Briefing

This interview with Larry Robbins, founder and CEO of Glenview Capital Management, was conducted by Eric Larsen, managing partner, and condensed by Dan Diamond, executive editor.

Question: We've talked with many health system CEOs for this series, but you're unique: The head of one of the most prominent hedge funds in the world. I'd love if you would enlighten us a bit about your fund and your industry.

Larry Robbins: Our hedge fund is in its 15th year of operation; we've got more than $10 billion of capital under management.

And ironically, while we're best known for our ownership stakes in hospitals, we didn't own a hospital stock until 2011.

How to describe the hedge fund industry? Hedge funds are investment partnerships. We take positions in various companies—sometimes very significant positions—in [hopes] of increasing our investors' capital.

There's no way to be foolproof, but at Glenview, we guard against the risk of permanent capital destruction by investing in businesses that are known and knowable, and by investing in a deep research team.

You know, one of my mentors, Charlie Leeds, was almost embarrassed to be a hedge fund guy. When people would ask him what he did for a living, he'd say, 'I make analogies.'

It was partly out of humility. But it's an accurate description of what we do professionally. We try to see one situation and understand how it's analogous to other situations that we've seen in the past. Even if that analogy is between a hospital company and a paper plant, say. And then decide on what that means for investing our clients' capital.

Q: Some hedge funds are known for being very active at buying shares in companies and then directing them on what to do. You've said—and I love this phrase—that Glenview is more 'suggestivist' than 'activist.'

Robbins: We call ourselves suggestivists because we recognize that when you own a minority stake, you should feel it's not only your right, but your responsibility to make appropriate suggestions to improve the position of the company and then to substantiate them, and to support those arguments.

So whenever we engage a management team, we don't engage them with a viewpoint that we've figured out the answer. We will make suggestions. And management or the board will push back or offer alternative. And therefore, we want to make sure that we have an intelligent exchange of views and dialog about the risks and opportunities of certain paths.

Q: I think last year your flagship fund had an 84% profit. It was just some stratospheric number.

Robbins: Yeah, we did okay.

Q: Right, you did 'okay.' Among hedge funds, you've been unique in your focus as a long-term holder; you've followed the motto, 'Think like an owner, not a trader.'

Robbins: We are proud of our role in being long-term owners. We've owned a stake in Cigna for six years. We've owned stakes in companies like McKesson and Fisher Scientific, which is now Thermo Fisher, for more than 10 years.

Q: But you're relatively new to being major investors in the hospital industry.

Robbins: That's right. Until 2012, hospitals were less than 5% of our overall portfolio.

Glenview's had a long-term research commitment to health care, and even a long-term research commitment to hospitals [too]. But it's only a recent phenomenon that the combination of share prices, and industry conditions, and our own view of future fundamentals, have intersected to the point where we could become major and significant shareholders within the hospital industry.

Q: And under your leadership, Glenview Capital has invested billions of dollars in the hospital industry—you have major positions in organizations like HCA, Tenet, and CHS.

With that in mind, you look at all the top 50 most influential people in health care, it strikes me that your name should be pretty prominent on that list.

Robbins: I appreciate your kind comments. But I would push back: we probably haven't been very influential in health care. Sure, I think we've been influential in health care equities. And the way in which those organizations allocate capital, the way in which they attract capital.

But when I think about people who are influential in health care, I think about the men and women who are responsible for delivering health care services to patients.

There's no way that a passive owner, or even an active owner, has been as influential in health care as scientists, and researchers who are coming up with cures for disease. Or any executives who are rolling out service networks to increase standards of care, and increase patient quality, frankly.

Thoughts on the hospital industry

Q:  Glenview is the single largest shareholder for Tenet. You are also one of the largest shareholders for HCA and Community Health Systems.

I've worked with those organizations, and hold them in high esteem, but some aspects of their strategies are strikingly divergent. HCA has been clear about not wanting to migrate too fast toward population health. On the other hand, Tenet is designing an intentional move toward insurance and population health.

That means in your portfolio, you've got several different companies that are approaching the same set of circumstances with highly variable strategies. How do you think about that?

Robbins: We see the similarities of all three organizations, HCA, Tenet, and Community being far greater than the differences.

It might be helpful if I explain how we see the industry.

Q: Of course.

Robbins: We look at the universe as 5,000 total hospitals, and approximately 900 are for-profit. About 18% of the industry.

Meanwhile, we think about 1,000 hospitals, or 20% of the industry, are large-scale, well-run, not-for-profit hospitals like the Cleveland Clinic or Mayo Clinic. Or like NYU, here in New York City.

If one looks at the operating structure of those hospitals, the for-profit hospitals make about 15% EBITDA margins. The not-for-profit, scale performers, make about 9% EBITDA margins.

And then the other 62% of the industry, 3,200 hospitals, make approximately zero. They are not only not-for-profit by charter, they're not-for-profit by income statement. They make between 2% and -7% EBITDA margins.

And when you then add necessary capital expenditures, maybe 3% to 4% of revenues, they are bleeding cash on an annual basis.

Q: I gather it's a very different industry than other industries where you've invested.

Robbins: Yes. The scale dynamics are such that, in a free market, you'd assume the smaller hospitals would close and go out of business. That their volumes would then add up in the larger players.

However, health care is not a free market business.

If there's 435 men and women in the House of Representatives, and there's 5,000 hospitals, that means there's 11 hospitals per district, six of which don't make any money. Collectively hospitals are the second largest employer in most districts, and consumers don't like to drive an extra 30 or 40 miles to go to the next hospital in single hospital markets.  As such, closing unprofitable hospitals is bad politics, creating a floor on hospital reimbursements

Because of those dynamics, it's not really the economics of the low-cost producers—the HCAs, the Tenets, the Community's of the world—that dictate the economics of the industry. It's the economics of the high-cost producers and how low can prices and reimbursement really go.

Q: And that helped shape your decision to invest in the industry—that the for-profit hospitals are best-positioned to take advantage of the underlying trends.

Robbins: For those reasons we believed, and still believe, that 2012 represented a trough in government reimbursement per procedure to hospitals. That rising tide will lift all boats. And from our firm’s perspective, it was most important for us to own as large of a swath of the sector as we could.

We also thought that hospitals could go from a good business to a great business.

Going back to 2007, we expected that universal health care was likely to be part of whatever health care reform happened beyond the 2008 elections. That it might go into effect in 2011.

We'd had success making investments in the pharmaceutical industry ahead of the Medicare drug reforms, and thought that was instructive. That if policymakers believed it was unconscionable not to give seniors access or coverage for the pharmaceuticals that the doctor had prescribed, they would determine it was similarly unconscionable that we wouldn't provide basic health care for up to 60 million Americans. Even if in reality we were providing that care, we were just providing it very inefficiently.

Q: So the market opportunity was clear to Glenview.

Robbins: If you know a busload of tourists was coming and filling a half-empty hotel, you would want to own the hotel. If you knew a busload of fee-paying patients were coming, you'd want to own the hospital industry. Because right now, patients are in those beds and they don't pay anything, or those beds are half-empty and they're not getting any revenue.

The incremental economics of universal coverage should be most pronounced on the hospital industry.

Looking at underlying trends

Q: Tell me how you think Glenview's hospital investments are playing out—how your perspective on the industry has evolved.

Robbins: Our view is that the industry [remains] highly attractive.

Anywhere amongst the for-profit hospitals, or the large-scale not for profits, you'll find a very good and protected market. For us, it was more important for risk management that we deploy capital across a large number of names rather than put all our eggs in HCA, or all our eggs in Tenet. We felt that risk management was more important than the strategic differences.

We also think that it's highly likely that [the for-profit hospitals] we've invested in will succeed in their stated mandate. And that's what we're seeing presently, certainly as the Affordable Care Act numbers are starting to come through. I think we're likely to see that for the next three or four years.

Those strategic differences between the companies will really take hold when we then get to the end of the consolidation phase, and the relative changes in the strategy will truly determine relative differences, organic revenue growth. We don't think that that's high on the list right now.

Q: You just mentioned consolidation in the industry, and we're seeing a proliferation of new national systems, of new super-regionalsystems. How much more consolidation do you think there's going to be? How much of a rationalization across the industry are you predicting?

Robbins: Let's take the two biggest urban players you mentioned, HCA, and Tenet. If you added them together—and I'm not suggesting this, of course—but you know what percentage of the hospitals we have in the United States? Eight percent.

So on a national level, even if you combined numbers of the largest systems, this isn't as consolidated of an industry as we would see in retail, or in other sectors where you start to worry about anti-trust risk, and other things on a national level.

On a local level, of course, it's important to have local competition, and local choices. But we don't appear to be bumping up against scale constraints on a national level, no matter who combines with whom.

You know, in every hospital merger we've seen, the announced synergies have been approximately 40% of target EBITDA. So if one buys a hospital with 100 million of EBITDA, through cost savings, the acquirer's generating 140 million dollars of EBITDA to them.

From our archives: More about investor-owned hospitals

CHS completes HMA acquisition, becomes largest U.S. hospital chain

Tenet a rare for-profit system experimenting with ACO

HCA posts 42% increase in profits after big growth in admissions

Building a culture

Q: As you reflect on your successful run, Larry, is there any recipe to your analytical success—any specific training that you did when you were young that shaped you?

Robbins: My two most important role models are my parents. My mom's a schoolteacher. My dad was an accountant who eventually ran a horse race track. My learning style as a kid was I learned by observing. As an observant kid, I observed the process and the values of my parents.

I was also fortunate to have an academic background in engineering and business that didn't make me a very interesting person to talk to, but reminded me that in a variety of disciplines, that it just comes down to the simple, multi-variable equation. You can simplify that equation, you can try to get down to the smallest number of variables possible, and then with that focus one can keep track of the things that really matter, and the levers that really matter.

Q: How does that philosophy manifest in your leadership decisions?

Robbins: While we're known for our health care investing, we don't do biotechs because we can't figure out phase two and phase three drug trials. They are beyond our analytical expertise.

There's areas around the world that we don't follow because it would take too much of a human capital infrastructure and commitment, and it's therefore beyond our capabilities. In choosing the simplest businesses with which to try to allocate our capital, we can try to take on all those challenges and feel like as a team we can succeed in it.

Q: You work on Wall Street; you've worked with health care and philanthropic leaders. How different are those worlds, at the end of the day?

Robbins: In my philanthropic work, I've been fortunate enough to witness phenomenal social entrepreneurs who could absolutely be Fortune 500 CEOs, or Silicon Valley CEOs. And through my board service, I've been able to learn from them. They've helped me understand issues of culture and leadership.

As they've built these fledgling organizations from heart and soul to an actual highly effective, human capital organization, I've been able to observe ways in which they've tried to build team and culture, so that that goes from being a functional institution to truly being a team and family.

It was helpful in terms of building a human capital of business, which was something that I had no experience from. That's helped me think about how to build Glenview.

Q: I know your organization has been built from within.

“Every single senior person in Glenview started out as a junior person at Glenview.”

Robbins: Every single senior person in Glenview started out as a junior person at Glenview.

It's not that we don't respect senior people at other organizations—we just think that as a training and development organization, that that organic farm team approach will best serve us as we move throughout time and be able to withstand any winds of change in the industry.

You know, I've done work with KIPP charter schools, too. I make no apologies for it, but as a hockey coach for my kids, almost every phrase I use to motivate the kids is stolen from KIPP. "Team beats individual," for example. And I really believe that.

In any organization, all the stresses and all the responsibilities can't rest on any one person's shoulders. I'm a big believer that it's teams that win championships—not individuals.

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