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Challenges and Opportunities Facing Community Hospitals

HealthLeaders magazine, September 13, 2009
DUBE: There are a lot of resources out there, but many communities, for reasons that I don't fully understand, are insulated from best practices.

HAWTHORNE: Which really surprises me because our boards are made up of many people who run big companies. That's one of the issues I've constantly worked on with our board. I request of them to not leave their business experience at the door when they walk in the boardroom of our hospitals or our systems because we need all their knowledge and experience.

DUBE: That's true, but the nonprofit board is different. Mission is very different than margin. Stakeholders are very different than shareholders. And I think there is a need for highly specialized expertise. If you have a brain tumor, you don't go to an internist. You go to a specialist. Specialists in investment banking and health law do these deals day in and day out. A lot of times, local communities believe their local lawyer who's never done a deal like this ought to do the deal, or the local investment banker. Sometimes that can work, but I've come in a lot of times to clean up messes and the community suffers because the deal was insufficiently structured or negotiated.

SHELTON: The general theme is that it is the community's assets and that's what most boards ultimately struggle with. I look back on some communities that have sold their hospital and it hasn't worked out so well. They didn't consider what the long-term repercussions would be. At the time, the idea was just to monetize it. Look, everybody has their own opinion, but around LHP we believe it is the community's asset and we will be best served by finding ways to work with the community to preserve input into the delivery of healthcare.

HEALTHLEADERS: LHP's strategy involves capitalizing the hospital in return for some level of ownership stake, but the board is still 50% controlled locally. This type of deal is messy and complicated, right?

SHELTON: And time-consuming.

HEALTHLEADERS: So why take on this extra responsibility?

SHELTON: If your sole purpose in this business to make money?to maximize margins?you're in the wrong business. That's how LHP got formed. We could just buy hospitals, but we found out in our careers that it's a lot more fun working with local people about local healthcare. It's a good business because it's rooted in a strong culture of taking care of patients and working with people who have a shared vision.

HEALTHLEADERS: You and Dan got started with this model years ago at HCA, correct?

SHELTON: We did a number of them with HCA and later, Triad, that have been hugely successful and we enjoyed doing them. But it takes a lot of time and effort. I did a partnership with Doug, but when it came down to it, it wasn't just Doug and me. We could sit down and work out a business agreement. But the process took a year or so because Doug wasn't going to do anything unless his board was completely on board with the idea of having a partner that was a for-profit entity. But it's well worth it because you end up with good partners and allies that you're going to have for a long time.

MOEN: There are two components of our growth strategy. They work hand-in-glove. One is the joint venture strategy where we share ownership with nonprofit hospitals. The other is our way of doing business. Culture is very important to our success. I think culture trumps strategy every time. We have a collaborative culture, which means working with others is the way we do business. This means that we're going to share the ownership, governance, and decision-making with our hospital stakeholders. Most capital partners don't want to share these important attributes of their hospital. LHP does well in these joint venture hospitals because we grow patient volumes. Growing volumes means working with local stakeholders: our nonprofit partner, the community leaders, the medical staff, and integrating all of them into decision-making. Increasing patient volumes is the hardest way to grow the business. The easiest way is to cut expenses or raise rates. But neither one of those options are very good strategies in the long run. It's easy to find somebody to share the ownership with. What's very difficult to do is find somebody to share control. We have found a way to do this with our partnership.

BUCKALEW: They bring an expertise we needed in knowing how to run a hospital. Not to say that the previous people who ran the hospital didn't know what they were doing, but there's a confidence that they know how to run a hospital and they provide some of the means for us to make decisions that we couldn't make before.

DUBE: Joint ventures are more complicated than outright sales because you have to live together. The other thing that complicates it immensely is the fact that many boards don't understand that you can joint venture your entire hospital and maintain your tax exemption as a minority equity partner, take out dividends and not have to pay taxes on it, and have 50% of the board even though you may only own 20% of the equity.

HEALTHLEADERS: And in terms of decision-making, is it a collaborative mechanism as opposed to the experts telling the local folks how they ought to do it?

BUCKALEW: They're not telling us. They're advising the board. We have one vote and LHP has one vote. HEALTHLEADERS: What if you disagree?

BUCKALEW: It dies unless we both agree. And I think that's the one thing that we had a hard time believing. We own 23% of the hospital. So that's a wonderful position to have when you're 23% owner. Another interesting thing is that it was a win-win because now the county is receiving taxables off the hospital property itself. And we as a foundation will receive moneys down the road once the hospital is completed to do healthcare initiatives in the community.

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