Members of the Premier hospital alliance have voted to streamline group purchasing operations, boost cash dividends and more closely align payments to the volume of products purchased by participating hospitals.
As part of the overhaul, Premier will raise the proportion of dividends paid in cash to as much as 80% of the alliance's net income from 50% or less today. In addition, later this year Premier will make a one-time cash payout of excess equity accumulated by member hospitals that could reach $160 million.
"We're going to be very aggressive about moving the cash that Premier generates back to our owners," said Richard Norling, chief executive officer at San Diego-based Premier. "It makes no sense to retain cash in excess of capital needs," he explained. "Owners are in the best position to decide what to do" with the excess cash.
Such payments aren't viewed by alliance hospitals as a critical benefit of membership. But combined with the changes in how they are made, the disbursements may help Premier remain competitive in the race for new members. Rival alliance VHA, based in Irving, Texas, has paid 100% of net income as dividends since 1996, according to Curt Nonomaque, its chief financial officer.
Premier officials said better-than-expected purchasing results accelerated an existing plan that would have raised distribution in 2001.
Norling said that financial performance of the 1,700-hospital not-for-profit hospital alliance has been "greater than even our fondest dreams."
In fiscal 1999 ending June 30, he said he expects group purchasing to exceed $10 billion from about $8.5 billion in the previous year. The strong purchasing performance has buoyed Premier's financial results. In fiscal 1998 Premier's net income surged 72% to $95.1 million from $55.2 million in 1997. Revenues climbed 43% to $302.4 million.
Shareholders of Premier approved the restructuring at the alliance's annual governance conference held in Phoenix last week.
Perhaps the most dramatic results of the adjustment will be one-time payouts in September that Norling estimated would total between $140 million and $160 million.
The payments were made possible by Premier's restructuring of capital requirements, which had tied up many shareholders' dividends in equity stakes. An unspecified but substantial windfall from Premier's investment in Hawk Medical Supply, Pittsburgh, which was sold to McKesson Corp. (now McKesson HBOC) last year, also helped fuel the payout. Terms of that transaction were not disclosed, but Premier officials said last week that the alliance had netted $48 million from the Hawk sale.
All 215 shareholders in Premier will get some cash, Norling said, but the amounts will vary depending on their equity positions.
Thomas Corder, president and CEO of 345-bed Camden-Clark Memorial Hospital in Parkersburg, W.Va., said he expects to see cash dividends of $25,000 to $50,000 that he will be happy to plow back into operations. Though dividends won't transform Camden-Clark's bottom line, Corder supported the changes.
In a companion move, most of Premier's shareholders will start to get fatter dividend checks from the group purchasing operations starting next year. The 50 largest systems can expect payments of $1 million a year or more, Premier said, with the very largest earning about $7 million.
Historically, Premier paid out only half of its net income as cash. And many hospitals within Premier had not seen cash distributions since the alliance was formed in 1996 through the merger of American Healthcare Systems, SunHealth Alliance and Premier Health Alliance.
That's because Premier's group purchasing arm, called Purchasing Partners, is a limited partnership that required each shareholder to build up a capital balance of about $1.7 million through retained dividends, regardless of the health system's size or purchasing volume. The smallest hospitals and systems were allowed to pool resources to meet capital requirements. Under the new Premier structure, these suballiances are unnecessary and will be dissolved.
As a result of the restructuring, members' required equity stakes will be directly proportional to their purchasing volume. Dividends, in turn, will be paid in proportion to equity held.
The dramatic financial moves punctuate the quick rise of Norling to Premier's CEO. Robert O'Leary, who remains chairman, quietly ceded the CEO title to Norling last September. Norling, formerly CEO of Fairview Health Services in Minneapolis, joined Premier as chief operating officer in October 1997.