April 5, 2007 in City

For-profit group eyeing Deaconess

By and The Spokesman-Review
 

Empire Health Services officials have notified local doctors and competitors that they are talking with the largest for-profit hospital system in the country, possibly about the sale of Deaconess Medical Center and Valley Hospital and Medical Center.

Community Health Systems Inc., of Franklin, Tenn., was the only “potential partner” discussed by name during meetings this year with medical executives about the future of Empire, Spokane’s century-old nonprofit hospital system.

“They were the ones they mentioned,” said Brian Seppi, president of the Spokane County Medical Society, who was among doctors and medical staff invited to weigh in on potential negotiations.

Community Health was also the only potential buyer specifically mentioned to officials at Sacred Heart Medical Center, Empire’s leading competitor.

“We know that they have been part of the entourage that’s come to town and are taking a look at Empire,” Skip Davis, Sacred Heart’s chief executive officer, said Wednesday.

“I talked to (Empire executive) Jeff Nelson about a week ago, and he shared that they were a candidate.”

A deal is far from certain, and Community Health is only one of several potential investors or buyers that have expressed interest, Empire board member Judy Cole said Wednesday.

“It’s safe to say we’ve had some good conversations with them,” she said, declining to elaborate because of an agreement to keep talks with potential investors secret.

Yet the board’s discussions with Community Health – which is poised to own more than 140 hospitals in 28 states – signal a willingness to consider a for-profit buyer whose entry into Spokane could radically alter the region’s medical landscape.

“It certainly is the case that for-profit entities have a clear signal about what their goal is: They have to make enough money to keep their shareholders happy,” said Carolyn Watts, a professor at the Resource Center for Health Policy at the University of Washington.

A firm focus on the bottom line may well be what’s needed to ensure survival of Empire, which has rebounded from a $36 million deficit in 2004.

CEO Nelson is credited with a $40 million turnaround of the struggling system, whose two hospitals serve about 30 percent of the local medical market, according to state figures.

Despite the promising numbers, the board hired Cain Brothers last fall. The Wall Street hospital brokers were asked to help find “strategic partners” for Empire, a move industry analysts agree almost always signals a sale. Cain Brothers representatives didn’t return a call on Wednesday. Neither did officials of Community Health or a public relations company that handles its media inquiries.

By any account, Community Health Systems Inc. is buying hospitals at a brisk rate.

Two weeks ago the firm announced a deal to buy Triad Hospitals Inc. for $6.8 billion. That move would give Community Health its first foothold in the Northwest through ownership of two hospitals in Oregon, including one south of Portland in McMinnville, and another in Springfield, near Eugene.

The hospital company, founded 22 years ago and traded publicly since 1991, focuses on hospitals in small cities.

Both Community and Triad have their hospital holdings concentrated in the South and in small cities. The Triad proposal will boost Community Health’s annual revenues to about $10 billion.

If a for-profit buyer is the successful bidder for Empire Health, it will be the second time in Washington’s history that a nonprofit hospital system is converted to a for-profit entity. In 2003, Health Management Associations Inc. of Florida acquired two Yakima hospitals owned by Providence Health System.

That was an unprecedented move in Washington. Of the state’s 97 hospitals, only seven are for-profit, noted Watts, of the Resource Center for Health Policy.

“We’re affectionately referred to as the Soviet of Washington in other places,” said Watts, “although we aren’t the only state that turns up its nose at for-profits.”

The Empire change would trigger Washington’s hospital conversion process, which requires the state attorney general to ensure that a nonprofit’s charitable assets are protected.

The possibility of a for-profit buyer worries the medical community, said Seppi, of the medical society. Most of the 800 doctors represented by the society enjoy shared privileges and a sense of collegiality at Sacred Heart and at Deaconess, he said.

“My biggest fear is if there were a big split, that collaboration would be damaged,” Seppi said.

That concern was echoed by Dr. Katherine Tuttle, director of research at Sacred Heart Medical Center, who spends about 20 percent of her time with Deaconess patients.

“I think it’d be very sad to see that facility go away,” she said.

Officials at Sacred Heart, which is operated by Providence Health System, worry that a for-profit buyer might not uphold existing arrangements to share responsibility for charity patients and the uninsured.

“I don’t think that we could block an acquisition process, but I certainly would like to be on the record about making sure they know that Spokane has a population that needs caring for,” Davis said.

The question of competition would also loom large in a for-profit environment, he said. Sacred Heart and Empire now exist in an atmosphere of friendly challenge, in which they vie for certain segments of the market, but collaborate on others.

Community Health has a reputation for being community-minded in the cities in which they’re the single hospital, but that could all change in Spokane, he said.

“In a competition environment based on the need to get a return out of their investment, their behavior might be very different,” Davis said.


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