Many community hospitals experiencing financial difficulties or capital deficiency see only a few unappealing options for securing their future: selling outright, merging with a large chain or nonprofit system, or continuing to struggle as they fall further and further behind the competition. HealthLeaders Media recently convened a panel of experts for a high-level discussion on a third choice for such hospitals: Union with a well-capitalized partner that allows the hospital to retain significant operational control.
senior leadership editor,
HealthLeaders Media, Brentwood, TN,
chairman of the joint venture board,
Pocatello Health System, LLC
chairman of the board,
LHP Hospital Group, Inc., formerly Legacy Hospital Partners, Inc.
Texas Health Resources
LHP Hospital Group, Inc., formerly Legacy Hospital Partners, Inc.
Proskauer Rose LLP
Sponsored by: LHP Hospital Group
: Mark, as a leader on the board of a county-owned hospital system that was looking to consolidate into a new facility, what factors contributed to Portneuf Medical Center's inability to access capital?
: We started out using municipal bond financing about two years ago and we were able to get the first phase of what would have been three to four more phases of funding. We were in preparation for the second phase in March 2008 and we were still fairly confident we could get financing?that basically was about the only market open to us. The citizens of our county were not going to approve a revenue bond.
: Many of us were looking at our capital allocation in a way that continued to provide growth for our systems. Part of it was a prioritization process. Beginning last summer, things shifted a bit in terms of factors that affected one's thought process with respect to capital expenditure, such as declining reserves, changes in patient payment mix, and increases in charity and bad debt. So all of a sudden, your operating performance started to back off. Philanthropically, people were beginning to look at scaling back their giving as well.
: You're seeing the segmentation of the healthcare industry. Maybe 15% to 20% of healthcare systems are doing well financially. It becomes a priority of spending. How do you take care of the community assets that you are entrusted with and how do you prioritize capital and be responsible, especially given the tightening economy? Even before the economy started to tighten we had the other group of providers that were already struggling. That's 50% to 60% of the facilities. They haven't had access to capital because they haven't had the income statement or the balance sheet to support it. They're faced with how do we meet the needs of our community that we are entrusted with and how do we provide the services that our community needs given the fact that we don't have the financial income statement or balance sheet to support getting resources. Mark's group was at that point.
: When you think about the governance of hospitals and health systems, their influence on this kind of decision with respect to growth and development or retrenchment or independence is critical because that's where the decision ultimately is made. So you get back to the issue of board education, board knowledge, board loyalty. Unless there's some sense of thinking toward the future in a proactive way, you can easily restrict what a hospital or health system can do.
: It's the rare independent community hospital board or community health system board that decides it wants to give up local control and join a larger system, whether nonprofit or for-profit. Local control has often trumped mission for a lot of independent community hospitals.
: So what does local control mean?
: A lot of boards have trouble explaining that. But who typically are the folks who decide to give up independence? The folks who are in financial distress and who are looking for a white knight. The worst time to do a deal is when you have to.
: Mark, what were some of the concerns that your fellow board members had with the inability to access the capital markets?
: The goal was to be a full-service hospital representing that community. There were always discussions about being bought out or merging, but we wanted to go our own way. We didn't know that there was a partnership-type model out there. We were looking at building that new hospital within an eight-year time frame. For physicians, that's a lifetime. And they didn't want to wait eight years. As we explored how we could build this facility quicker, it became evident that the amount of money that we'd have to have to accomplish this in a shorter period of time became the major issue, and that split the board. Some people said let's go find a partner.
: Whatever the strategic process, the education process is time-consuming. But they all have one thing in common, the history of the facility. Most people don't go on those boards for pay, because none of them get paid. They're there because they care about their community and they care about the healthcare in their community. They struggle with what the options are, given their strategic position.
: Most local nonprofit boards presume that the only folks who can make the decisions about how best to deliver care and what care to deliver are local and not somebody from out of town. And that's an inhibitor considering aligning with the nonprofit across the street or the nonprofit across town or, God forbid, the for-profit from out of town.
: Our first decision was to go to a 501(c)(3) status, which would still be a tax-exempt organization hospital locally controlled but not owned by the county. But we encountered difficulties with that because the county didn't want to give up the asset. That was understandable.
: Even when it's been privatized, they still see it as the community hospital, the county hospital.
: We were hell-bent to do what we could to stay independent. Becoming a nonprofit 501(c)(3) corporation was our first thought because at that time, we didn't know what else we could do.
: That is compelling about your model, Denny. Mark and Monte, I know you have plenty of experience with hospitals that have looked at options that didn't quite work for them. So where do they find out about other possible options?
: Professionals can answer those questions. Had we known of this resource, it might have saved us some valuable time in our search. Even though we had a good attorney that understood the issues, we came to appreciate Monte's large picture of what we needed to think about as the future of the hospital.