A lousy partnership is hard to endure, but splitting up can be almost as tough, even if the challenge is worth it.
A review of six mergers that failed in the past two years found that the resulting dozen independent hospitals and systems are mainly in the red. Many say the losses are at least partly because of expenses associated with their breakups, such as legal fees, additional support staff and the purchase of new information systems. In addition, splitting up can mean lost economies of scale, less leverage with managed-care payers and higher capital costs.
Splitting up also saps management attention during transitions to solo status that can take months or years. And although some splits have been amicable, some former partners have engaged in legal battles, adding to the financial and administrative strains.
Yet, over and over, hospitals that separate from partners say they believe they are doing a better job of meeting the needs of their communities. Many say they have stopped trying to do everything and instead are focused on their core competencies. They say they are nurturing their relationships with physicians and employees and are able to make decisions faster.
And as a result of operational improvements, they believe they will be able to improve their financial results.
Still, it's too early to know which will survive on their own, and which will be forced to consider another consolidation down the line. For now, none of the executives interviewed claims to be considering another merger. In fact, most say their boards and managers would staunchly oppose it.
Here are snapshots of how the former partners are faring post-divorce.
In their wildest dreams, executives at Milton S. Hershey Medical Center, Hershey, Pa., didn't expect that the hospital would achieve a profit in its first year after a breakup with Geisinger Health System in July 2000. Under the merger, the 575-bed teaching hospital reportedly had been losing more than $20 million per year.
For the fiscal year ended June 30, Hershey posted a profit of $1.05 million on revenue of $447.5 million.
"We sort of did the impossible," says Chief Financial Officer Mary Bednar.
Bednar credits higher volumes, including an 8% increase in inpatient admissions and a 15% boost in outpatient cases, for the turnaround. Although higher demand may be partly responsible, she believes new leadership created "a feeling of ownership and camaraderie that translates into business."
The hospital paid $22.8 million last year to support the Penn State University medical school. But unlike its structure before the merger, the hospital is no longer part of the state university system, which means it can run more economically, Bednar says.
Differences between faculty and medical staff at the two organizations led to the breakup of the system in summer 2000. Questions of governance and mission also prompted strains in the combined organization.
Hershey faces many challenges, including long-term debt of $133 million, which financed new information systems and the purchase of accounts receivables and equipment from the former system. In addition, Bednar says the medical center needs to increase its profit margin to finance new capital improvements.
Similarly, Geisinger claims to have experienced a 15% boost in patient revenue in the past year, which is record growth, says CFO Kevin Brennan. But unlike Hershey, its bottom line has been solidly in the red.
The Danville, Pa.-based system lost $7.3 million on revenue of $707.3 million during the nine months ended March 31. Brennan partly blamed underwriting losses at its health plan. In addition to restructuring costs, the de-merger has been a drag on expenses. For example, Geisinger invested $30 million on information systems under the merger, which now is spread over a smaller organization.
In recent months, Geisinger has focused on recruiting physicians and adding new services, such as a 10-bed heart hospital opening this month in Wilkes-Barre, Pa. The hospital is expected to generate an annual profit of $4 million. It's an initiative that could not have been achieved quickly, if at all, under the merger because of internal conflicts, Brennan says.
Baptist St. Vincent's Health System
Financial experts weren't sure a breakup of two of the biggest providers in Jacksonville, Fla., would be a good thing. After all, it might mean losing efficiencies. Plus, their marriage had the unusual distinction among merged healthcare organizations nationally of being profitable.
But after about four years together, the constituent boards of Baptist St. Vincent's Health System decided to call it quits in June 2000, citing disharmony among their medical staffs.
To the surprise of some, the former partners seem to be doing better financially on their own, despite having to expand administrative staffs. Officials on both sides agree that higher volumes probably helped cover some of the millions of dollars in de-merger costs. (The partners haven't disclosed the exact losses.)
The merger was forged in the mid-1990s amid fears about the growth of managed care and competition from investor-owned chains. Now, both hospitals are strong enough to stand on their own.
"I guess it was a de-merger that occurred in a market-friendly time. This community actually needs more healthcare as it grows," says James Corrigan, CFO of St. Vincent's Health System, which includes a 500-bed hospital.
He says St. Vincent's, which is owned by St. Louis-based Ascension Health, incurred about $6 million in legal and financial expenses associated with the split.
Baptist Health CFO Michael Lukaszewski says the biggest challenge was dividing the information systems, which took about a year and a half and cost each system several million dollars in licensing fees and equipment.
Lukaszewski says Baptist Health, which has three hospitals and 600 staffed beds, added about 50 administrative positions to its staff of 3,800. "It wasn't nearly as much as I was fearful it might be. Things got simpler, so we truly could operate a little leaner," he says.
He adds there is no way that Baptist Health should consider a "merger of equals" again, although it might consider acquiring a smaller hospital.
St. Vincent's is doing just that. It has been negotiating to buy 240-bed St. Luke's Hospital in Jacksonville from the Mayo Foundation.
Heritage Health System
Failing to integrate their two-year 50-50 joint venture turned out to be a blessing when it came time to unwind a deal between Charleston, W.Va.-based CamCare and Appalachian Regional Healthcare, based in Lexington, Ky.
In 1998, the organizations attempted to combine the operations of hospitals in southern West Virginia located about 20 miles apart. But the merged Heritage Health System never had enough time to blend into a unified organization.
"The vision initially was one that incorporated a lot of sharing of services and talent, and that just never really occurred," says Larry Hudson, CamCare's CFO. "When it came time to separate . . . it was very easy to unwind." CamCare recently was renamed Charleston Area Medical Center Health System, which has three hospitals.
Although both hospitals have continued to lose money since their August 2000 split, they are improving, officials with the parent systems say. Both are focusing on physician recruitment and improving operations.
The joint venture never performed well. In fact, Appalachian Regional lost $2.1 million from the joint venture in fiscal 2000, according to rating agency Standard & Poor's, which applauded the breakup in a rating report released earlier this year.
CamCare's 74-bed Plateau Medical Center has improved operations such as payroll and purchasing, Hudson says. In part, he says, it's because CamCare administrators had time to devote to improving operations at the hospital after selling the system's money-losing HMO. "After the unwinding occurred, CamCare folks became more involved. We were able to fine-tune the operations to eliminate a lot of the costs," he says.
Stephen Hanson, president and chief executive officer of Appalachian Regional, agrees. He says the system's 190-bed Beckley (W.Va.) Appalachian Regional Hospital showed positive cash flow for the first time in about five years in the past fiscal year, although depreciation of assets generated a net loss. In part, he says, losses were attributable to physician practices that were part of the joint venture.
"I think if Beckley remained part of the Heritage system, we would have seen continued losses," Hudson says. "We changed administration and made operational changes, which might not have been doable under the joint venture."
For a prime example of a failed merger, look no further than the inaptly named Optima Health.
Unlike Heritage, the partners in Manchester, N.H., had combined their operations by consolidating acute-care services on one campus, that of Elliot Hospital. But the move provoked community opposition and led the state attorney general to issue a finding that the consolidation violated the hospitals' charitable missions, leading to its demise.
Undoing the system in July 1999 was a costly, untidy process. Both hospitals had to establish departments that previously were shared or had not existed. In addition, legal fees siphoned cash as Elliot waged a court battle, ultimately without success, to retain a share of the open-heart surgery program that had been claimed by former partner Catholic Medical Center. The litigation was settled in February.
"The de-merger was a horrible year," says Beth Hughes, chief operating officer of 235-bed Elliot.
For now, both hospitals are focused on returning to being full-service community hospitals after five years of collaboration.
Although Elliot had been losing money, it saw a dramatic improvement last year because of a 22% growth in revenue, Hughes says, thanks to new program development, particularly for outpatient services. It has opened a wound center and a sleep center and plans to inaugurate a $3 million multidisciplinary geriatric center in north Manchester in March 2002. This month, it plans to expand and improve its outpatient surgical services by moving those procedures to a building built by Optima to house cardiac care. Hughes says the building "sat idle at least a couple of years" because of a moratorium on new construction while the de-merger was being litigated.
"If anything good comes out of a de-merger, it's been for us a refocused effort on the Elliot healthcare system and an effort to deliver healthcare the way our community needs it," Hughes says.
Meanwhile, Catholic Medical Center has battled to regain footing after services such as obstetrics, pediatrics, neurology and general surgery were moved to Elliot. The hospital lost almost 10% of its market share and 12% of admissions in 1999, which contributed to losses, according to S&P, which lowered its rating on the hospital's bonds in March 2000. It posted a small profit during its most recent fiscal year, ended June 30.
Catholic Medical Center and its subsidiaries had "significant additional expenses" in its first year out of Optima, says Darlene Stromstad, the hospital's senior vice president of strategy and corporate development. "I think it's safe to say that we were approaching a million dollars in legal fees," she says.
Still, Stromstad believes the 225-bed hospital will do better financially on its own. Volume increased 7% last year, she says.
UCSF Stanford Health Care
Both Stanford Hospital and Clinics and University of California San Francisco Medical Center have posted some red ink in the past year, but neither regrets their split last year despite their tough operating environment.
The merger of the Bay Area's two prestigious academic medical institutions into UCSF Stanford Health Care was supposed to serve as a bulwark against managed-care companies, but instead their two-year partnership was a financial loser that reportedly generated little more than animosity between the hospitals' respective medical faculties, which failed to agree on reimbursement issues.
"From an operational and a cultural perspective, the organization is better off," says Stanford CFO Kenneth Sharigian.
Both systems lost money last year. They cited higher costs, unprofitable managed-care contracts and low government reimbursements, as well as restructuring expenses.
At 580-bed Stanford, financial functions such as budgeting and accounts receivables had to be rebuilt, Sharigian says. The two-hospital system has focused on reducing costs and improving billing and collections. Stanford also terminated capitation contracts for its faculty physicians. "It's a recognition that it is not what we do best-managing populations of patients," Sharigian says. It also shed a nine-physician primary-care group in Half Moon Bay, Calif., about 25 miles west of the hospitals in Palo Alto, Calif.
Sharigian says the de-merger will probably hurt hospital pricing. "At the same time we believe the Bay Area is large enough to support two academic medical centers," he says.
UCSF is gradually stemming its losses, which were $15 million in the first three months after the merger and are projected to be $10 million for the current fiscal year, which ends June 30, 2002. "Where the organization is today is a huge step forward from where we were a year ago," says President and CEO Mark Laret.
Laret says two-hospital UCSF reduced costs with the help of a turnaround firm last year but still could increase efficiency and boost capacity. It currently operates about 500 beds. This year, it has planned about $45 million in capital projects, including adding operating rooms and intensive-care beds, as well as equipment upgrades.
Unity Health Services
David Seifert, president and CEO of St. Anthony's Medical Center in St. Louis, believes his 684-bed hospital is far better off not tied to Unity Health Services, which was formed in 1995 to create the region's second-largest healthcare system.
St. Anthony's left last year, saying it wanted more autonomy.
"As an independent institution we're better able to meet the needs of the community. We found in an integrated delivery system we weren't meeting all of those needs, particularly the relationships with the physicians." Hospital admissions increased 15.4%, compared with the year before, and Seifert believes that's a positive sign. While the hospital has been saddled with managed-care losses, Seifert says it was able to negotiate higher reimbursements since leaving Unity. The new rates took effect in January.
"One of the problems we had in the system was trying to come up with a contract that all six hospitals were happy with and that the physicians were happy with," Seifert says. "In the integrated delivery system, we'd gone a good year without any increase."
St. Anthony's lost money during its fiscal year ended June 30 but anticipates a $2.7 million profit this year.
For now, Seifert doesn't believe St. Anthony's needs a partner to be successful. Its future is as a niche player, he believes. St. Anthony's is the only hospital in the southern region of the St. Louis metropolitan area, which has a population of about 500,000, and is the operator of the second-largest emergency room in the state.
It does, however, intend to partner where appropriate with large systems such as BJC Health System, SSM Health Care and Tenet Healthcare Corp., which dominate the metro area.
Not so with its former partner, St. John's Mercy Health Care, which is owned by St. Louis-based Sisters of Mercy Health System. St. John's continues to own a majority interest in Unity with another partner, St. Luke's Episcopal-Presbyterian Hospital. Unity now includes pharmacies, optical shops, home health services and durable medical equipment businesses. St. Luke's left Unity earlier this year.
With the breakups, Sisters of Mercy lost significant market share in St. Louis, dropping to third from second, according to credit-rating agency Moody's Investors Service.
Michael Morgan, president and CEO of St. John's, which comprises two hospitals and a 140-physician primary-care group, says that since the de-merger, the hospital has seen improved financial performance in some areas, such as the physician group.
But with higher volumes increasing demand for resources, the impact of the de-merger is murky, he says, and it's too early to tell whether the system has lost market clout, which could prompt it to look for another merger partner down the line.