When 25-bed St. Vincent Randolph Hospital in Winchester, Ind., considered expanding services in rural Randolph County, it chose an unusual strategy that may be a new model for collaboration.
St. Vincent, whose parent company is Ascension Health-owned Central Indiana Health System in suburban Indianapolis, wanted to maintain local control, but recognized that the county's 27,000 residents were leaving the area for tertiary care and specialty services it could not afford to offer. Instead of competing with or merging with a bigger system, St. Vincent in April agreed to sell a 10% minority stake in itself to a former rival, Muncie, Ind.-based Cardinal Health System. Cardinal is the parent of 350-bed Ball Memorial Hospital in Muncie, an east central Indiana city of 70,000 not far from Winchester.
Ball paid $2.4 million to St. Vincent Randolph for 10% of the hospital's hard assets, money the tiny hospital can use when it moves into its $15.6 million replacement hospital later this year.
The move mirrors a series of recent partial ownership ventures between large healthcare systems and smaller systems or individual hospitals, said Chicago healthcare lawyer Scott Becker of the firm Ross & Hardies.
Becker said a plethora of hospitals, located mostly in western states, have been buying interests in smaller hospitals.
"I see this as a way to infuse cash into local hospitals, which are then able to maintain the control that they want," said Becker, who added that larger hospitals benefit by strengthening relationships with outlying hospitals they hope will refer patients to them for tertiary care.
"This is the latest model among all the different hybrids, partnerships, joint ventures, mergers and affiliations," said Richard Wade, the American Hospital Association's senior vice president of communications. "As hospitals try to find ways to link up to avoid duplication of services and seek ways of working together in communities, they're looking for new forms to demonstrate their commitment."
He said smaller, mostly not-for-profit hospitals need access to technology, equipment and specialty services. Larger hospitals can offer all of that with the hope of getting referrals for big-ticket tertiary-care services.
"The addition of a financial stake backs (the investing hospital's) commitment, makes it a longer-term investment. Over the years if the relationship develops, such arrangements could look like a system," Wade said.
One of the driving factors in the new model is hospital nervousness about access to capital in a time of market uncertainty. Hospital investment income is down and operating income has flagged, resulting in many downgrades of hospital credit ratings. He said compliance with privacy and information systems requirements of the Health Insurance Portability and Accountability Act of 1996 is expected to cost U.S. hospitals $23 billion, capital outlays that are difficult if not impossible for small rural hospitals to absorb. In addition, he said, the traditional methods of affiliation haven't worked well for some systems.
"Mergers have come apart, and some hospitals have been burned, making many hospitals reluctant to pursue them," he said.
In the Indiana example, Central Indiana Health, St. Vincent and Cardinal began discussions in 1999 to collaborate on services in Randolph County. Both systems operated primary-care clinics and home health agencies in the county. They consolidated them into one clinic operated by St. Vincent and a single home health agency run by Cardinal, said Cardinal President and Chief Executive Officer Robert Curtis.
"That went very well for us," he said. "And in April, we decided to carry the relationship further, agreeing to acquire 10% of St. Vincent Randolph Hospital. We will lease space in their new hospital and operate a dialysis center and rotate our family practice residents through there and provide emergency room coverage."
He said the 10% commitment is worth $2.4 million and gives Cardinal a seat on the hospital's board.
In a similar affiliation, Columbus-based OhioHealth, a 10-hospital system, bought 25% of 84-bed Grady Memorial Hospital in Delaware in April for an undisclosed cash infusion, leading to a new relationship for both organizations.
"This is the first time we've done this," said Steve Garlack, a senior vice president of OhioHealth, who said the organizations will jointly develop a plan for how the money will be invested.
"There's an advantage for (Grady) in being part of a system and obviously there are advantages for us," Garlack said. "To the extent that we can support them, make them more successful, they're going to refer more patients to our tertiary centers. What we tried to do was take the best of our relationships with other hospitals, whether the form was management, affiliation and or membership, and fuse that into a new kind of relationship. A partial equity position gives Grady an infusion of capital that they can use."
Garlack declined to disclose the dollar figure for the deal. And he noted some concerns.
"Clearly there are some areas we need to be cautious about because of our close proximity to other hospitals (in Columbus and central Ohio)," he said, explaining that the system's lawyers advised Grady and OhioHealth they are prohibited from discussing prices, wages and joint managed-care contracting.
"There are clearly limitations. We have a representation (four of 16 seats) on Grady's board and they will have seats (one of 15) on our board, but they control their board," Garlack said. "We'll be learning as we go."