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BY ANN HALPERN
In an economy rife with major corporate
mergers, we hardly notice such deals anymore.
But merger talk concerning area
hospital systems has the local healthcare
community buzzing.
The recent management agreement
between Eastern Health System, Inc. and St.
Vincent's Hospital is getting the most attention,
but UAB Health System just extended
its agreement with Baptist Health of Montgomery.
"Elsewhere in Birmingham, Baptist
is struggling," says hospital consultant
Steve Nash of Nash Capital
Advisers. "Carraway has struggled.
Bessemer Carraway affiliated with
UAB."
On June 17, St. Vincent's and
Eastern announced their consulting
deal that became effective July 1.
Under this agreement, St. Vincent's
affiliate Seton Health Corp. of North
Alabama will provide management
and administrative services to Eastern.
Nash says the agreement makes
sense. "It's the one
nonprofit in town
that has an entrepreneurial,
doctorfriendly
hospital
practice environment."
"Both hospitals
are success stories
when you look
at where they've come from and
where they are now," says Jay Weatherly,
principal and co-founder of
Cullman-based Salient Health Ventures.
"They both have strong track
records in serving the community."
Eastern Health System serves one
of Alabama's fastest growing areas. "If
you look at the pie-shaped piece of
their market going out to St. Clair
County, there's no competition," says
Nash. "Eastern is about a $200 million
enterprise with Medical Center
East doing about $130 or $140 million.
The other entities do the rest,"
he says, adding that Eastern has
about 30 percent of the market and
could easily be larger if they had
more physicians.
But this system has challenges.
Although there are sizeable cash
reserves, those are offset by bond
covenants that preclude spending, so
Eastern cannot move to create an
environment that would be a magnet
for physicians. "There is no additional
cash from operations to allow them
to pursue improvements in services
and relationships with physicians,"
says Nash. CEO Bob Chapman's
expected retirement within the next
few years adds a leadership change to
the list of challenges.
"Medical Center East is a very
profitable hospital, but some ventures
within the system are not profitable,"
says Nash. Troubled system
components include their Oneonta
hospital and the nursing home and
assisted living facilities in Birmingham's
East Lake area.
Only time will tell if the recent
agreement between the two hospitals
is the first step toward a merger. That
may never happen. The two certainly
will have a closer relationship that
targets improved services.
If St. Vincent's bought Eastern,
they would get a big asset with associated
debt. "I think the proceeds
would go to pay off the debt and anything
left over would go into some
kind of foundation," says Nash. He
believes it is equally likely that St.
Vincent's may be content to maintain
the good thing they already have and
not risk too-rapid expansion.
Although the Eastern/St. Vincent's
agreement has generated a lot
of talk, it is not the only such alliance
in the area. Strengthening a relationship
begun in March 2004, the UAB
Health System and Baptist Health of
Montgomery recently extended their
management agreement with Baptist
Health becoming a UAB affiliate.
Under this agreement, Baptist
Health will transfer its two Montgomery
Hospitals (Baptist Medical
Center South and Baptist Medical
Center East) and Prattville Baptist
Hospital into a healthcare authority
created by the University of Alabama
System.
What fuels such agreements?
Usually it's the need to fund improvements
and add physicians. These can
be difficult tasks for nonprofit hospitals.
"You want people coming together
for the right reasons," says Weatherly.
"You want a merger to occur by
two willing parties." He says the
recent agreement between Eastern
and St. Vincent's creates a foundation
for an effective merger. "I sense there
are willing parties coming together in
good faith and it seems to be for the
right reasons."
Weatherly says a mistake made in
some healthcare mergers is putting
too much emphasis on cost savings
and program elimination. Some consolidation
makes sense, but he urges
particular caution on the clinical
front. "Make sure not too much of
the decision is based on eliminating
clinical programs. One clinical program
can serve two locations." Most
cost-reducing consolidation opportunities
come in business office functions,
administrative functions and
corporate services like marketing and
planning.
"Operating a hospital in solid
financial fashion in the state of
Alabama is a very difficult challenge,"
says Weatherly. "There are a handful
of hospitals in the state that are doing
pretty well compared to national
indicators." He says most of these
hospitals are in markets without
much competition. "They can reach
critical mass with their patient volume."
Alabama hospitals do more charity
care than the national average
because of the state's socio-economic
conditions. Those same conditions
dictate a Medicaid program that is
among the poorest in the nation.
Reimbursements from healthcare
insurance carriers including Medicare
also are lower here than in many
states. The result is an environment
where some 70 percent of the state's
hospitals operate in the red.
"Compared with national indicators,
the cost of hospitalization in
Alabama is among the lowest in the
country," says Weatherly. "Hospitals
&are heavily utilized because of the
health of our population and issues
with access."
It is estimated that for every
$100 a hospital bills, it will collect
$30 to $40, in some cases less. "A
program like Medicaid which is
doing the very best it can to make
ends meet may only reimburse 18
cents on the dollar," says Weatherly.
Nash says hospitals with the
highest bond ratings and debt ratings
from Moody's and Standard & Poors
have an average age of their facilities
of 8.7 or 8.8 years. Average age is calculated
by dividing accumulated
depreciation by this year's depreciation.
He adds that Alabama Hospital
Association statistics indicate the
average age of Alabama hospitals is
14 years.
"There's a vast difference in performance
between nonprofit hospitals
with newer facilities and those
with older facilities," says Nash.
"BBB-rated hospitals and below tend
to have facilities that are in excess of
11 years old."
Weatherly says one of hospital
management's prime considerations
in mergers is the effect on the medical
staff. "Physician issues will probably
be the most sensitive. Those will
be well thought through."
Hospital administrators constantly
strive to match market needs
for the appropriate number of specialists
without alienating established
loyal physicians. Having more affiliated
physicians helps a hospital generate
revenue to improve and expand,
but that very growth is a big part of
what attracts physicians. The two
goals feed each other.
"A physician is looking for an
administrator, a campus and a facility
where he or she can practice successfully
and have some autonomy,"
says Nash.
Hospital consultants say starting
clearly defined goals and an exit plan
should those goals not be met can contribute
to the success of alliances such
as management agreements or mergers.
More alliances are likely as hospitals
find innovative ways to deal with
challenges. "If you want to be able to
be strategic in the future, you'd better
be taking care of business today,"
Nash advises hospitals. "Those who
are successful on their campuses
today will have choices in the future
by controlling their own destinies."
This article taken from the July 2005 issue of the Birmingham Medical News.
© 2005-2008 Salient Health Services, Inc. All rights reserved.
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