As the recent breakups of UCSF Stanford Health Care and Penn State Geisinger Health System show, the climate for hospital marriages is bad.
Both systems split after they failed to meet financial and operational goals.
By contrast, one system that has weathered its financial losses is the Health Alliance of Greater Cincinnati, which recently survived an unusual referendum on the merits of its existence.
The alliance's 5-year-old joint operating agreement states that if the alliance fails to meet a certain financial standard, the hospitals may leave. Specifically, the exit clause kicks in if the alliance falls into the lowest quartile nationally on a financial health index for six consecutive quarters (See chart).
The last six quarters haven't been kind. For its fiscal year ended June 30, the alliance posted an operating loss of $36 million on revenues of slightly more than $1 billion. The system expects to break even on operations in the current fiscal year.
Anticipating that it would fall below the benchmark for the sixth time for the quarter ending Dec. 31, alliance leaders asked the five hospital members to waive their right to leave for two years while a turnaround plan is completed.
Fortunately for the alliance, all five hospitals voted to waive the exit clause by a Dec. 1 deadline, allowing the system to continue without fear of defection. The alliance includes Christ, Jewish and University hospitals in Cincinnati; St. Luke hospitals in Florence, Ky., and Fort Thomas, Ky.; and Fort Hamilton Hospital in Hamilton, Ohio.
Alliance officials said the financial test caused them to soberly consider the merits of their JOA. The board of Christ Hospital, one of the largest stakeholders, with 29% equity, hired Ernst & Young to conduct a 60-day assessment of the alliance's financial performance.
Christ Hospital board Chairman Thomas Petry, also a member of the alliance board, says the study indicated that "there are a lot of healthcare organizations and systems that are facing financial stress just as we are. We concluded that what problems existed financially and otherwise with the alliance were eminently fixable."
Petry says Christ Hospital's leaving the alliance was never on the table.
When the alliance was being crafted in 1994, few systems had achieved cost reductions, increased market share and leveled the playing field with managed care, says Chief Financial Officer Phil Tempel. The financial test was meant as an early warning device.
"We wanted to build in a discipline so that we would continuously monitor our financial performance," Tempel says, adding that it has served its purpose well.
But the test has limitations. For example, it is skewed because the alliance operates on a different fiscal year than many other hospitals and systems, so the organization feels the impact of major federal budgetary changes sooner, Tempel says. The board's financial committee met in April to consider revising the index but decided not to change it.
Tempel says using a single number as a benchmark can be an oversimplification, but it's useful when conveying information to a diverse group of board members. "If you just left it up to us financial types, we'd make it so complicated no one would understand it," he says.
It's unclear how common such financial provisions are in JOAs and mergers. William Cleverly, founder of the firm that developed the index the alliance uses, says he thinks such provisions are on the upswing because of situations like that of bankrupt Allegheny Health, Education and Research Foundation in Pennsylvania.
But there could be legal pitfalls. If a low bar is set to dissolve a deal, the Internal Revenue Service and federal antitrust enforcement agencies may not view the merged organization as the product of a true merger, notes Mike Anthony, a partner with McDermott, Will & Emery in Chicago. In his experience, the use of financial targets to justify abandoning a marriage is not common.
In a JOA, an exit clause could jeopardize an organization's tax-exempt status, Anthony says.
But federal agencies consider other factors as well. In fact, the alliance became the first hospital JOA to receive a formal IRS ruling approving its tax-exempt status. The IRS determined the member hospitals had relinquished significant control over their operations to the JOA.
In the past two years, the alliance has suffered cuts from the Balanced Budget Act of 1997 and some of the lowest commercial reimbursement rates of any major metropolitan area, Tempel says.
He says the alliance has cut costs to the tune of $90 million per year; it has closed one hospital and is consolidating administrative functions. It has also met benchmarks for market share and patient satisfaction, Petry says.
The turnaround plan includes increasing revenues by negotiating higher rates from payers and increasing volume, reducing unspecified costs, and eliminating home health services. The alliance also has decided to discontinue obstetrical services at Jewish Hospital.
To maintain creditworthiness, the alliance wants to build its operating margin to 4% in several years, Tempel says.
"I think another realization that came was that the healthcare environment today is very difficult together or apart," Tempel says.