Propelled by managed-care forces, two of New York's premier names in academic medicine have agreed to create a new parent company and move toward a full-asset merger, perhaps in the next three to five years, officials said.
Last week's announcement of a letter of intent between New York Hospital and Presbyterian Hospital follows a long, intermittent courtship suspended at times by dates with other suitors (July 17, 1995, p. 17; Aug, 15, 1994, p. 18). It's the third major consolidation of teaching hospitals in the market this summer.
Earlier, New York's Mount Sinai Medical Center, New York University and NYU Medical Center agreed to merge teaching hospitals and medical schools (June 24, p. 24), and New Hyde Park, N.Y.-based Long Island Jewish Medical Center and New York's Beth Israel Medical Center announced plans to create a single parent corporation (July 8, p. 18).
Officials also announced that Columbia and Cornell universities plan to establish "an alliance" of their physicians and medical schools. It will not involve a merger but is intended to generate some economies of scale, link clinical expertise, establish a united physician network and increase market clout. Columbia's College of Physicians and Surgeons and Cornell University Medical College have more than 2,800 physicians at the two teaching hospitals and an additional 8,000 physicians associated with the medical schools' affiliates and the hospitals' networks.
Once a definitive agreement is reached in about 60 days, New York Hospital and Presbyterian will remain separate organizations under a new parent called New York and Presbyterian Hospitals.
Internal Revenue Service Form 990s for 1994 showed that the two institutions' total assets exceeded $1.6 billion.
Marcia Morris, Presbyterian's senior vice president and legal counsel, said executives decided not to merge assets and liabilities immediately because of the difficulties involved. But they still wanted to achieve some of the benefits of consolidation quickly.
Those benefits include opportunities to enhance revenues and market share, said William T. Speck, M.D., Presbyterian's president and chief executive officer. He also expects the two institutions to generate $50 million to $60 million in savings just by consolidating hospital support activities.
"It's going to be very hard for a payer to deny access to Columbia-Presbyterian or New York-Cornell Medical Center," he said. "I think we're too big, too prominent to ignore."
The courtship has been prolonged partly because both boards had to be assured that each institution could handle its debt service and operations, said David B. Skinner, M.D., president CEO of New York Hospital. Acknowledging that the state's deregulation of inpatient rates will spark a frenzied period of contract negotiation, Skinner said consolidation better prepares both institutions to make deals because "quality will win the day."
But observers said New York's academic institutions must be careful about presuming that payers will buy bigness.
"If this is a circle-the-wagons strategy, then it's a losing strategy," said Ted Nussbaum, healthcare practice leader of Watson Wyatt Worldwide's New York region. "If this a strategy intended to create a serious entity to compete in the managed-care marketplace, they've got a lot of work to do."
With an overabundance of beds in the market and an influx of managed-care buyers, providers must become more efficient, which means they'll have to take out beds, focus on outcomes and specialize in particular services instead of offering the full complement, Nussbaum said.
Few details of the consolidation have been worked out. For example, while Skinner will serve as CEO of the parent company and Speck will become president, no decisions have been made on how their duties will be split.
For the year ended Dec, 31, 1995, Presbyterian recorded a net loss of $1.9 million on net patient revenues of $747.8 million. That loss has been cut dramatically, from $50.9 million in 1992. In the first six months of this year, Presbyterian expects a $2.5 million surplus, said Susan Parker, a hospital spokeswoman.
In 1995, New York Hospital ended the year with net income of $14.6 million on net patient revenues of $630.9 million.
Each hospital also carries an anchor of federally insured debt, but a spokesman for the U.S. Department of Housing and Urban Development said it's too early to determine what impact the merger might have on that debt.