June 15, 2007 in City

Hospital deal near

For-profit company closer to buying Deaconess, Valley facilities
By The Spokesman-Review
 

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The pending sale of two Spokane hospitals to a Wall Street powerhouse would plow millions of dollars into aging Deaconess Medical Center and remake it into a tough competitor, say supporters of a deal with Community Health Systems Inc.

The scenario, announced Thursday, could remake Spokane health care as the for-profit company plies its moneymaking skills and leverage in Eastern Washington.

It would also create a new independent nonprofit community health-care foundation that would collect the balance of funds from the sale after Empire Health Service’s debts for Deaconess and Valley Hospital and Medical Center are paid.

Ron McKay, chairman of Empire, said the signing of a letter of intent with Community Health was a “landmark day.”

He anticipated a brief due-diligence period, quick negotiations and a final agreement within weeks.

The book value of Empire’s assets is $220 million according to its 2006 financial reports, though the number isn’t necessarily an accurate portrayal of the hospitals’ market value.

Neither Empire nor Community Health would disclose a possible sale price.

“What we have here is a nonbinding letter that says we’re serious about this,” said Community Health spokeswoman Rosemary Plorin.

Said McKay, “I think our community will be looking at a strong two-hospital system that makes it possible for no one to go any farther than the South Hill for medical treatment.”

Others aren’t so sure.

“We have enormous concerns with the sale of Deaconess and Valley to a for-profit corporation,” said Chris Barton, secretary treasurer of the union representing 1,400 registered nurses, technical workers and service employees at the hospitals.

“Will they focus on profits rather than the quality of care? We’ll be watching closely.”

Community Health was founded 22 years ago and is headquartered in the Nashville suburb of Franklin, Tenn.

Today it operates 80 hospitals in 13 states and earlier this year struck a $6.8 billion cash and debt deal to buy Triad Hospitals Inc. That acquisition, which is expected to close this summer, is a move that would create a mega-chain of 133 hospitals in 28 states – the largest in the United States. The deal also makes Community a self-described “highly leveraged” company with debts exceeding $9 billion even before buying the Spokane hospitals.

With more than 19,000 beds and projected patient revenues of more than $10.2 billion once its buyout of Triad is completed, Community Health bills itself as the nation’s biggest publicly traded hospital company.

Such financial firepower is exactly what Deaconess and Valley need, said McKay, who added that within five years Deaconess could be flush with new equipment ranging from beds to computers.

It may look similar on the outside, he said, but the inside would be “state-of-the-art.”

Empire Health CEO Jeff Nelson has said the hospitals need a $100 million upgrade. Waiting years to finance that investment might have been too late.

So last year Empire’s board began searching for cash, hiring a Wall Street hospital broker to help. Community Health quickly rose to the top as a possible source of money – a company aggressively growing, but also one that board members say fits with Empire’s culture and commitment to community involvement, providing medical treatment for the poor and uninsured, and collaborating with other hospitals.

As part of their research, Empire Health board members visited two Community Health hospitals of their own choosing, including one in Easton, Pa., and one in Lancaster, S.C. that were bought and absorbed by the Tennessee company.

Though most of Community’s hospitals are nonunion and operate in Southern states, the company has had labor disputes with the powerful Service Employees International Union.

One included a lengthy strike at the Easton hospital.

Barton, of SEIU’s state chapter, said the union is concerned because it is reopening the wage and benefit portions of its contract with Empire Health in August. The current contract expires in September 2008.

“We would ask for an agreement with Community and Empire that a sale guarantees workers would be in no danger of losing their employment,” Barton said. “They’ve refused to do that so far, and that’s disturbing for employees.”

Dr. Brian Seppi, president of the Spokane County Medical Society, said physicians are receptive to a deal with Community Health.

“It will be a positive to the community if we can get the capital needed to upgrade the facilities,” he said. “They said they will still have a strong local board … though we worry about for-profit status. But, the most important thing is that the capital needs are much more important.”

Empire has rebounded from a $36 million loss in 2004, but it’s not financially robust enough to pay for the upgrades required, executives have said.

Doctors want strong hospitals that continue to work together, Seppi said, pointing to the success of Inland Northwest Health Services, a joint venture of Empire Health and Sacred Heart Medical Center that operates St. Luke’s Rehabilitation Center, MedStar helicopter ambulance services, and shared information technologies.

“If we can be assured that’s going to continue,” Seppi said, “we’ll be supportive.”

Most of the 800 doctors represented by the medical society enjoy shared privileges and a sense of collegiality at Sacred Heart and at Deaconess, he said.

Seppi agreed that Deaconess and Valley need improvements in their buildings and equipment.

Without finding money for those purposes, the hospitals are in danger of falling so far behind market leader Sacred Heart and fast-growing Holy Family Hospital that they won’t be able to catch up and effectively compete for new patients.

Doctors are concerned about the trend toward larger hospital companies and the loss of local control, Seppi said, noting that even Sacred Heart and Holy Family merged into a group of 20 hospitals last year, though all were affiliated with the Catholic-based Sisters of Providence.

“The days of one-to-two hospital systems are numbered. To compete you have to be larger. I think physicians have realized that,” he said.

Rich Hadley, president and CEO of Greater Spokane Incorporated, said the “whole market area has benefited historically from having two strong hospital systems” that have set up partnerships like INHS and shared in providing charity care for the community.

“That’s our long-term history, and going into this I think we would hope that that’s preserved even though the ownership is different,” Hadley said.

The change could affect many companies that are suppliers for Empire, and those related businesses “I’m sure are anxious” to learn more about the potential new owner and to try to maintain their connections, he said.

Mike Wilson, president of Sacred Heart, said he is encouraged that Empire’s board will insist as part of any deal that Community Health shoulder its share of providing medical care to the poor and uninsured.

“We’re pleased they have found a capital partner,” he said.

Sacred Heart, with more than half of Spokane’s market share, has contemplated for many months what it might mean if a well-funded, for-profit company buys its main competitor, he said.

In similar situations elsewhere, hospitals have begun zeroing in on profitable procedures such as cardiac care.

“Our question at Sacred Heart has been ‘what will (Community Health) focus on, what won’t they want to be burdened with, and finally, what are our own plans?’” Wilson said.

Reaching the sort of profits demanded by a publicly traded company will be challenging for Deaconess and Valley.

Spokane’s nonprofit hospitals strive for a modest 3 percent to 5 percent profit margin. The gains are invested, used to finance construction and equipment purchases, and plowed into local charities.

As a corporation, Community Health expects a 15 percent margin after the large Triad merger. It does not yet pay dividends to shareholders.

And unlike nonprofits, Community would become a major Spokane County taxpayer.

McKay said people are upbeat.

“I only see good things,” he said.

Spokane may depend on Community Health’s motto: “Promises Made. Promises Kept.”

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