Less than a year after it bought Humana's last remaining hospital, Jewish Hospital HealthCare Services is selling it, citing reduced Medicare reimbursement rates.
The Louisville, Ky.-based system is selling Jewish Hospital Lexington, licensed for 174 beds, to Catholic Health Initiatives, the Roman Catholic system based in Denver.
The two sides signed a letter of intent on Sept. 24, and they anticipate closing the sale in late November.
In November 1997, Jewish bought the hospital from Humana, a Louisville-based managed-care company, intending to invest $10 million in new equipment and services and turn around the money-losing for-profit hospital.
Jewish wouldn't disclose the hospital's purchase or sale prices.
The prominent 11-hospital system cited declining reimbursements from Medicare, Medicaid and private-sector payers as reasons for its action.
That's a sea change from last year, when Jewish was all confidence. But by September, the system realized the investment couldn't be justified when its margins throughout its operations were being squeezed as thin as a blade of Kentucky bluegrass.
Linda McGinity Jackson, Jewish spokeswoman, said the margin squeeze was heightened by the system's obligations to Louisville's ambitious medical research development program that started earlier this year (Aug. 24, p. 36). The Jewish system will contribute $8 million to the program in 1998. It will also likely endow another chair at the University of Louisville for $6 million. Research is the Jewish system's first priority, she said.
It would be a stretch to make those investments while meeting the Lexington hospital's capital needs.
Bob Shircliff, senior vice president for Jewish Hospital Health Network in Louisville, explained: "In addition to the capital we'd just invested, we knew the (Lexington) hospital was going to need a continued infusion of capital over the next three to five years.
"In a market that had a number of mature, established healthcare providers, it would be unwise to escalate that capital war," he said. "Instead, we let that hospital be integrated in with another strong player."
That player is CHI, the powerhouse that now owns 69 hospitals in 22 states.
CHI is optimistic about its acquisition's potential. "The hospital is the only suburban hospital in the greater Lexington market, and it's located in the highest growth area for population and younger people," said Kevin Lofton, CHI group president based in Louisville.
CHI has a different-and more synergistic-strategy for its acquisition than the Jewish system did.
In 1997 CHI absorbed the Sisters of Charity of Nazareth Health System, based in Kentucky, and picked up five hospitals in the state. One of those, Saint Joseph Hospital, is the largest in Lexington, with 468 licensed beds.
Saint Joseph has no obstetrics services and has felt pressure from managed-care contractors to get into that business. Now it can simply "inherit" obstetrics from the suburban hospital without obtaining a certificate of need at its downtown hospital. All the maternity services will be offered at the suburban facility, Lofton said.
For the Jewish system, the Lexington hospital was isolated, whereas for CHI and Saint Joseph, it can be integrated into a larger network. The Jewish system hospital nearest the Lexington facility was Pattie A. Clay Hospital, 20 miles away in Richmond, Ky.
"We can integrate services, consolidate management staff," Lofton said. "In Lexington there are three dominant players: Saint Joseph, Baptist and the University of Kentucky. When you looked at (an isolated) fourth player, it made it difficult for that hospital to compete with the other three. We feel very confident we'll be able to make this a profitable hospital."
According to a financial report from HCIA, a Baltimore-based healthcare information company, Jewish Lexington in recent years has steadily lost money. In 1995 it lost $5.1 million on $34.6 million in net patient revenues; in 1996 it lost $5 million on $38.4 million in revenues; and in 1997 it lost $1.9 million on $32.6 million in revenues. Shircliff said it lost $3 million to $4 million in the most recent fiscal year.
"You have to remember this hospital was for sale for almost four or five years by Humana" and did not receive the investments it needed to compete.
Jewish began managing the facility in March 1995, and Humana invited Jewish to buy it in 1997, he said.
The average daily census at the hospital for the past year has been about 60 patients, or 75% occupancy of its 80 staffed beds, Shircliff said. HCIA reports the facility had a 53% Medicare caseload and a 2% Medicaid caseload in 1997.
The hospital has performed abortions, sterilizations and in vitro fertilizations on request from physicians, Shircliff said. Those procedures will stop once CHI takes over, in accordance with Roman Catholic directives on healthcare, Lofton said.