On Jan. 1, two hospitals in the Kansas City area changed hands in what was described as the largest single healthcare transaction in the region.
The deal was big enough to further tilt the balance in the market-which straddles the Missouri-Kansas border-in favor of the already-dominant provider, Health Midwest.
In the deal, Columbia/HCA Healthcare Corp. ceded control of 329-bed Independence (Mo.) Regional Health Center and 262-bed Overland Park (Kan.) Regional Medical Center to 14-hospital Health Midwest.
Health Midwest already had about 25% of the metropolitan area's inpatient admissions. The addition of the two suburban hospitals tips that market share closer to 35%, the system estimated.
Health Midwest now has 3,295 licensed beds and total revenues of $2.1 billion. With 14,700 employees, it is the second-largest private employer in the area, after telecommunications giant Sprint.
Observers and other providers are watching to see how aggressively Health Midwest exploits its dominance, especially in two sub-markets in the region, Independence and Johnson County, Kan. (See map, this page).
Health Midwest's acquisitions put the other major player in the market, St. Luke's-Shawnee Mission Health System, in a more defensive position. St. Luke's said its inpatient admissions are about 22% of the market.
Health Midwest's additions offer the prospect of a major consolidation and reconfiguration of local markets.
The change also has profound implications for managed-care plans, especially the two allied with the leading hospital consortiums, HealthNet and Blue Advantage.
Skeptics quietly wonder how it's possible to assemble such a huge share of the market without undergoing government review.
"What you have now is the clash of the titans, as Health Midwest and St. Luke's vie for the top spot," said Kansas City-based healthcare consultant John Leifer. "The key question is how Health Midwest utilizes its growing clout. Will it be to the advantage of patients or to their detriment?" Leifer asked.
On that question, he's not sure. "It may tip the scales of power unfavorably toward Health Midwest."
If these matchups had occurred earlier, in a different context, they might have prevented some new hospital construction that's adding capacity to a market that's already overbuilt.
Who's Hart-Scott-Rodino? Health Midwest acquired Independence Regional and Overland Park Regional without notifying the Federal Trade Commission for a Hart-Scott-Rodino antitrust review. It could do that because it is leasing the hospitals for 15 years, not buying them. It has an option to buy them at the end of the lease.
The situation has raised eyebrows locally, but so far, nobody is making a big stink about it. When pressed, G. Richard Hastings, St. Luke's chief executive officer, acknowledged he's not sure how antitrust regulators justify that distinction.
"It doesn't make logical sense to me, that you would exclude a lease (from antitrust review)," he said. "You could effectively lease everything in town and not have an excessive percentage of the marketplace."
Tom Cranshaw, Health Midwest's senior vice president for strategic planning, said Columbia preferred the lease to an outright sale.
"We didn't push the matter," he said. Health Midwest therefore didn't have to borrow money, sell bonds or spend reserves to execute the transaction. Lease payments will come from operating revenues.
Although both hospitals will now be operated by a not-for-profit system, they are technically owned by for-profit Columbia. Therefore, they will continue to pay local property taxes, Cranshaw said.
Marian Bruno, assistant director of the FTC's pre-merger notification office in Washington, confirmed that "if you sign a lease, it's not an acquisition of an asset" and therefore not subject to Hart-Scott-Rodino. The FTC would object only if the purchase option wasn't at fair market value, she said.
How Health Midwest consolidates its position is of special interest in the Independence and Johnson County communities. Patients are deeply attached to their hometowns and the institutions that serve them, and they rarely venture far for services.
Almost a monopoly. Now, both hospitals in Independence (the other is Medical Center of Independence) are controlled by the same organization, and that worries some people. "I don't know how in God's name that happened," Leifer said. "I would be very concerned about the lack of competition in Independence if I were a patient or payer in that community, or a physician. It may not be illegally monopolistic, but it's the closest thing I've seen."
That worries Hastings, too. His primary concern is how the health insurance market will shake out. St. Luke's now owns 51% of HealthNet, a managed-care plan with more than 350,000 enrollees. Several other hospitals hold minority equity positions in HealthNet, including Independence Regional and Bethany Medical Center in Kansas City, Kan. Independence Regional derives a substantial amount of patient volume from the plan.
When Columbia bought both hospitals several years ago, the facilities retained their HealthNet equity. Now that Columbia has left the market, both facilities have changed hands. Bethany is now owned by the Sisters of Charity of Leavenworth (Kan.) Health Services Corp.
The hospitals' equity position in HealthNet does not pass to their new operators, however. It has been retained by Columbia's Kansas City operating division.
The Sisters of Charity also own nearby Providence Medical Center, a Kansas City, Kan., facility allied with Health Midwest as a part-owner of Blue Advantage, an HMO operated by Blue Cross and Blue Shield of Kansas City. Health Midwest and the Blues coordinate marketing for Blue Advantage, as do several other hospitals that have equity shares in the HMO, including North Kansas City (Mo.) Hospital; Olathe (Kan.) Medical Center; and the University of Kansas Medical Center, Kansas City.
Hastings said Health Midwest's market share should not be a problem "as long as they don't try to exclude certain insurers, as long as people continue to have choice in the marketplace."
To make sure they continue to have choice in eastern Jackson County, Mo., St. Luke's-Shawnee Mission has purchased 45 acres along Interstate 470 between Independence and Lee's Summit, Mo. It plans to build medical offices there.
Health Midwest, meanwhile, will consolidate clinical services and medical staffs between Independence Regional and the other hospital it owns there, Medical Center of Independence.
"The interesting part of this is that those two hospitals held merger talks in the late 1980s. They never could get it together because of a dispute over who would run it," said Brent Schondelmeyer, a former journalist who has covered Kansas City healthcare.
Then Health Midwest bought Medical Center of Independence, and Columbia bought Independence Regional. The medical staffs of the two hospitals overlap substantially, Schondelmeyer adds, "so in effect Health Midwest is accomplishing a community-level merger that was discussed 10 years prior."
Signs of sensitivity. There are encouraging signs that Health Midwest is sensitive to the fears of patients, the business community and other providers.
In 1993 Independence Regional tried to build a large outpatient center in a growing suburban area, but Health Midwest used its political power to block the certificate of need.
But recently, Independence Regional reached an agreement to extend HealthNet's contract with Independence Regional from March 31, when it expired, to the end of 2000.
For now this may allay St. Luke's and other independent operators' fears that Health Midwest will align its provider network with the Blues and freeze out other insurers and providers.
At the same time, Independence Regional and Overland Park Regional have been admitted to all the Blues plans, including Blue Advantage. "So the managed-care implications of this transaction are starting to play themselves out," Cranshaw said. "The hope is that by doubling the primary-care base of physicians available to Blue Advantage, that will make Blue Advantage more attractive in the marketplace. That will help the participating hospitals and physicians increase their enrollment."
Hospital congestion? In Johnson County, St. Luke's has just opened its new south campus, with 75 licensed beds.
That's only the latest facility to open there recently. Olathe Medical Center is building a $50 million expansion that raises its bed count to 200 from 130, and to the north, the University of Kansas is opening an ambulatory facility in Lenexa, just four years after Health Midwest added 158 beds at its nearby Menorah Medical Center.
Perhaps not coincidentally, Johnson is among the most affluent counties in the nation. It had per-capita income in 1995 of $32,909 compared with $23,651 in Jackson County, Mo.; $17,051 in Wyandotte County, Kan.; and the U.S. average of $23,196.
"What is occurring in Johnson County has far less to do with demand and far more to do with striving for market dominance in the Kansas City metroplex," Leifer said. "Johnson County is clearly the prize. It represents the primary demographic . . . with optimal insurance coverage. Furthermore, it's home to many of the community leaders.
"Can you justify the level of construction in the county? I can't imagine a mathematical demand model that would support the number of licensed beds in Johnson County."
Cranshaw said Health Midwest is looking at consolidating services between Menorah and Overland Park but hasn't decided yet. There is little overlap in the medical staffs.
"When we started, we had hoped if we could purchase Overland Park Regional we would not have built so much at St. Luke's South," Hastings said. "Our idea was to buy and consolidate and reduce overall operating costs." Instead, St. Luke's felt obliged to spend $55 million to create its new market presence in south Johnson County.
Montague Brown, editor of Healthcare Management Review and a former healthcare consultant in Kansas City, cautions that Health Midwest's size doesn't equal strength. "In order for this to work for them well, they've got to achieve synergies between these institutions."