A purchase price of $28 million may sound steep for a small hospital with a bottom line barely in the black at $175,000.
Yet, Health Midwest, the Kansas City-area's largest system, is said to have paid just about that much last year for 255-bed Menorah Medical Center in Kansas City, Mo.
System executives called the figure an "inaccurate net cost" but wouldn't comment further.
No matter what the price, Menorah might be worth it to Health Midwest. The hospital's dowry includes an outpatient center in booming Johnson County, Kan., and zoning for an inpatient hospital there. Unlike in Missouri, hospitals in Kansas don't need state approval to build.
Health Midwest didn't buy just another hospital, it bought entry into the area's fastest-growing county, where the median income tops $47,000. The system now plans to build a $65 million, 150- to 175-bed facility at the Johnson County campus and move Menorah there within five years.
A firestorm of sorts followed that announcement. About 45% of the staffed beds in Johnson County hospitals are vacant on any given day. Competitors argue that a new hospital will mean even less efficient use of existing hospitals-just as the nation is pressing for a wiser use of healthcare resources.
"That doesn't make good sense," a competitor told the Kansas City Star-blunt words in a hospital community that prides itself on congeniality. "A tragedy," one local analyst said.
In an era that decries excess capacity, Johnson County is a lesson in market dynamics.
As the region's population shifts to Johnson County, medical resources must move, too, said Robert Brown, president of Mid-America Coalition on Health Care, a think tank of local businesses and hospitals.
"I wouldn't call that controversial," Mr. Brown said. "The question is, `How much of the infrastructure do you take with you?'*"
For Kansas City-area networks like Health Midwest, a presence in Johnson County is vital not only because of its robust demographics but also because contracting demands are likely to grow more pressing, hospital executives said. Those include the ability to cover a broad service area and to spread financial risk.
"If you can't provide a facility in Johnson County, you're at a severe handicap," said Kevin Gross, who heads the Kansas City region for Columbia/HCA Healthcare Corp. Its acquisition of Galen Health Care last year brought Columbia/HCA its first Kansas City-area hospital, 260-bed Overland Park (Kan.) Regional Medical Center in Johnson County. Each Kansas City-area provider network now operates a Johnson County facility.
Market maneuvers. Breakneck consolidation followed the entry of
Columbia/HCA into the market. A year ago, 18 of the Kansas City area's 32 acute-care hospitals belonged to regional or national systems. Today, 29 belong to a system or are developing a network with other hospitals.
Health Midwest has merged with Menorah and now operates 10 acute-care hospitals in Kansas and Missouri with 1,856 staffed beds. It also crafted a complicated affiliation with 324-bed North Kansas City (Mo.) Hospital and a merger agreement with 75-bed Park Lane Medical Center in Kansas City, Mo., expected to be completed soon.
Columbia/HCA has added 266-bed Independence (Mo.) Regional Health Center, two surgery centers, a home healthcare agency and several occupational health clinics. It still is discussing deals with area hospitals, attached or not, Mr. Gross said.
Meanwhile, eight hospitals have formed the Mid-America Health First alliance with the intent, someday, of sharing a bottom line. Strategic planning still is under way, and an organizational structure hasn't been adopted.
Five outlying hospitals also have linked with 464-bed University of Kansas Medical Center in Kansas City. The Jayhawk Alliance, now a forum for comparing outcomes and clinical practices, might become a vehicle for managed-care contracting, executives said. It would operate largely in Kansas, outside of the metropolitan area.
Past relationships have shaped the networks. For example, Health First hospitals helped form HealthNet, a managed-care organization with 380,000 enrollees.
Location defined relationships further. Health Midwest's acquisition of Menorah brought the system into Johnson County. The system now crosses the Missouri River and the state line, which divide the metropolitan area physically and, some residents said, psychologically.
Health First hospitals run a large loop in the area. Columbia/HCA still must find a home north of the river and farther west of the state line.
"People in the north treat the Missouri River as if it were the Amazon," one healthcare executive said. State Line Road, meanwhile, may as well be a "moat filled with alligators."
A key county. On one level, networks' need for geographic spread, and thus a presence in Johnson County, boils down to residents' demand for healthcare where they live and work. Consider the experience of Kaiser Permanente.
In 1990, Kaiser's health plan named Menorah its sole provider of inpatient care. At the time, the plan's enrollment of 45,000 reportedly was projected to grow to 100,000 by 1994. Its limited provider network is one reason its membership hovers around 46,000 today, some observers said.
"I don't know that we anticipated the market would be so competitive," said Cheryl Dillard, a Kaiser spokeswoman. The location of inpatient facilities, however, matters little compared with outpatient and emergency-care sites, she said.
Kaiser is re-evaluating its network with the merger of Menorah and Health Midwest and, by year end, will contract with a hospital system for more sites. "We predict growth as a result of expanded access points and enhanced products and a very competitive rate structure we're putting in place," Ms. Dillard said.
Although more than half the area's 1.5 million residents belong to some type of managed-care organization, fierce competition has kept most HMOs and PPOs from tightening networks. "The history of networks in Kansas City is that they fixate on size and having every hospital and every physician," said David Fields, executive director of Humana Health Care Plans.
To date, many employers have been unwilling to limit their employees' choice of providers, said Richard Krecker, president of Blue Cross and Blue Shield of Kansas City.
Both executives see signs of change. This spring, Kansas City, Mo., decided to rebid the healthcare coverage of its employees to a single contractor, saving $3 million, after hard lobbying by the Blues. However, the three-year, $60 million contract was won by Humana and Kaiser, teaming up in their first joint venture.
"Our belief is that you still need plenty of clinical outlets and plenty of places to get treatment," said the Blues' Mr. Krecker. "Where our strategic thinking is taking us is more in the delivery of care."
The Blues control 52% of an equity partnership formed with five providers, including Health Midwest. The product, Blue-Advantage, has 30,500 enrollees after about 21/2 years in the market. With 12 providers, it's their most limited network.
Changes like these could make Johnson County an even more important battleground for Kansas City-area networks. Its population is expected to grow about 50% to 522,840 by 2020, when it will represent about 28% of the 10-county area's population, compared with about 23% today.
If provider networks take on financial risk for the health of managed-care enrollees, either alone or in partnerships with payers, contracts in high-income Johnson County will balance the risk, said Arthur Williams, a professor at the University of Missouri in Kansas City. Johnson County also gives Missouri-
based providers a presence in two states, balancing regulatory risks.
Provider rivalry. Competition among hospitals probably is the strongest force behind current network formation, rather than pressure from employers or payers.
The arrival of publicly traded Columbia/HCA stirred the market. It has an attribute every hospital executive fears and envies: access to capital for expansion.
The company and Health Midwest have run up against each other repeatedly. Health Midwest was discussing partnerships with Overland Park before Columbia/HCA acquired it. Columbia/HCA pursued Menorah and North Kansas City, both of which are now Health Midwest partners.
Meanwhile, Health Midwest's power has grown. A decade ago, its executives envisioned an integrated system. A striking symbol of their progress is the three hospitals surrounding the city's Liberty War Memorial. They were independent facilities in 1987. Today, they belong to Health Midwest.
The failure of its hospitals' early experiments with their own managed-care plans led Health Midwest to seek partnerships with payers, such as its equity interest in the Blues plan, said Dennis McClatchey, a senior vice president at Health Midwest. Those are viewed as one of its greatest strengths.
"Health Midwest has always been willing to do something, and if it didn't work, chuck it," one observer said. "It's always been out there, on the edge."
In contrast, Saint Luke's Health System, one of the area's most prestigious providers because of its high-level care, has reacted more slowly to changes. Its two hospitals were the last to join the Health First network. One reason for the delay was a dispute with other Health First members over competition in Johnson County.
Last October, Saint Luke's won zoning approval for a $25 million outpatient center in Johnson County. The facility would compete against the two Health First members that drove the network's formation: 325-bed Shawnee Mission (Kan.) Medical Center and 250-bed Saint Joseph Health Center in Kansas City, Mo., just bordering the state line. Shawnee Mission completed a $22 million expansion of outpatient services in 1991; Saint Joseph will finish a $25 million outpatient project on its campus in December.
Saint Luke's has delayed its project so Health First members can discuss alternatives, said Richard Hastings, executive director at 528-bed Saint Luke's Hospital. "What was a major barrier became a stepping stone," Mr. Hastings said.
Until it formally joined the Health First network in March, the Saint Luke's system discussed a possible relationship with Columbia/HCA. Today, it's studying a closer affiliation with 301-bed Bethany Medical Center in Kansas City, Kan., another Health First member. Both providers said they're committed to the Health First network and conduct affiliation discussions with the knowledge of other executives.
Dividing lines. While Johnson County has prospered, Jackson County-the core of the metropolitan area-has struggled. Its population dropped by 21,000 between 1970 and 1990. Although Jackson County is expected to recover a bit by 2020, Johnson County will be nearly its equal in population (See chart, p. 139).
There is a perception that suburban Johnson County has sapped the strength of the inner city. Such tension is common between cities and their suburbs throughout the United States.
In the Kansas City area, however, the strain might be somewhat worse because of its division between two states. This is, after all, the region nicknamed "Bleeding Kansas" in pre-Civil War days because of the fierce and frequent battles between pro-slavery Missouri residents and abolitionist Kansas settlers.
In the daily dynamics of the region, the state line is just another road, said Cheryl Jernigan, president of the Kansas City Area Hospital Association. Four in 10 Kansas residents cross it to go to work, and two in 10 Missouri residents do the same.
The economics of a state line, however, fuels resentment. Missouri taxes support the athletic stadiums and other cultural offerings enjoyed by residents of bordering Kansas counties. "People fail to appreciate what a state line does to a town," said Jeffrey Ellis, an area attorney.
The degree of tension is hard to measure, but it has made providers' moves into Johnson County a delicate task. They must fight the sense that hospitals are abandoning the inner-city poor for the wealthy suburbs. "Everybody has got to ask the question, `What is the institution doing for the less affluent?'*" said Mr. Williams of the University of Missouri.
Health Midwest executives emphasize the system's commitment to Jackson County. Menorah is part of the urban core, but so are three other Health Midwest hospitals, Mr. McClatchey said. In fact, the system last year announced plans to marshal millions of dollars to upgrade surrounding neighborhoods.
"Everybody now is trying to figure out the best use of resources," said Mr. Brown of the Mid-America coalition. "The providers are developing the models. They want to get ready for the point in time when the corporations say, `Hey, I want to look you over."'