Late in 2000, lengthy talks to form an affiliation between 343-bed teaching hospital Tufts-New England Medical Center in Boston and Hallmark Health System in nearby Malden, Mass., simply broke down.
Every time a decision had to be made, Tufts-NEMC President and Chief Executive Officer Thomas O'Donnell, M.D., traveled 55 miles across the state line to Providence, R.I. There he conferred with the 21-member board of his parent system, Lifespan Corp. He would return to meet with his own 21-member board, then respond to Hallmark.
"It was too many planes on the radar screen at one time," said Richard Quinlan, Hallmark's president and CEO. The extra corporate layer proved to be too much. Hallmark, at the time a four-hospital system, walked away from the deal.
It was a situation that became all too familiar for Tufts-NEMC, the nation's third-oldest hospital, in its five years under Lifespan's umbrella. Similar deals with nearby 172-bed Quincy (Mass.) Medical Center and 398-bed MetroWest Medical Center in Framingham, Mass., now owned by Tenet Healthcare Corp., fell through because local hospitals didn't think of Tufts-NEMC as a Massachusetts hospital, O'Donnell said.
Lifespan also felt the tug of a hospital that no longer fit with its system. "We decided to look at our relationships to make sure they were working for both parties," said George Vecchione, Lifespan's president and CEO. Consequently late last month, Tufts-NEMC agreed to pay $30 million in an amicable split from Lifespan. They expect to complete the separation by Oct. 31.
"In Massachusetts and Rhode Island, it appears all politics are local," O'Donnell said.
How times have changed. Hospital systems that formed in the '90s now are looking for ways to restructure, focusing more on operations and local market concerns. The first wave of hospital breakups hit in 2000 (April 24, 2000, p. 2). Now it appears a second wave of systems and hospitals are fine-tuning their operations, with some deciding to go it alone.
Boston's CareGroup Healthcare System has pared down to five hospitals as it struggles to survive and has considered completely unraveling. NYU Hospitals Center and 1,008-bed Mount Sinai Medical Center have reorganized. The 452-bed Piedmont hospital in Atlanta is re-examining whether it should leave its system and branch out on its own.
"They are making hard decisions about pruning their systems," said Martin Arrick, manager of Standard & Poor's for-profit hospital group. "Everybody is trying to improve their cash flow."
The good ol' days
Less than a decade ago, hospitals worked furiously to knit together large systems based on the assumption that they would be better positioned to negotiate with insurers and gain greater market clout. "If you were by yourself, you looked like the odd person out," O'Donnell said.
In 1997, Tufts-NEMC joined Lifespan in part hoping to land a contract with Harvard Pilgrim Health Care, which like many insurers was spreading across state borders and had a deal with Lifespan. That same year, there were a total of 197 mergers or acquisitions involving 308 hospitals nationwide.
But it was growth for growth's sake. The assumptions never panned out. Many insurers, including Harvard Pilgrim, pulled out of markets and changed the landscape. "The argument of doing this for economy of scale has probably run its course," said James Rice, vice chairman of the Governance Institute in San Diego.
Hospitals now tend to pursue more conservative acquisitions based on market-specific reasons, said Sanford Steever, editor of Healthcare Merger and Acquisition Monthly, New Canaan, Conn. In 2001, only 83 hospital systems made deals, involving 118 hospitals.
"They are smarter now because they have been burned in the past," said Pamela Federbusch, senior vice president of healthcare for Moody's Investors Service.
Systems that already exist are taking a close look to see what is and is not working, sometimes shedding facilities with a friendly handshake. The split from Lifespan reflects the current atmosphere, O'Donnell said. "What looks like an appropriate affiliation at one time may not in another," he said.
A silver lining
While breaking from Lifespan could help Tufts-NEMC form local relationships, it could prove an even greater benefit for Lifespan, which will drop to three acute-care hospitals. Lifespan had a systemwide net loss from operations of $34.1 million on total revenue of $1.3 billion for the fiscal year ended Sept. 30, 2001. Its overall net loss for fiscal 2001, including investment income, was $22.6 million.
But its results are improving. Lifespan is in the middle of a three-year plan to break even and is ahead of schedule, Vecchione said. It lost $5 million on operations in the six months ended March 31, compared with $25 million in the same period in 2001. By contrast Tufts-NEMC suffered a net operating loss of $10 million in fiscal 2001, ended Sept. 30.
"It's clear that NEMC was having a drag on Lifespan's systemwide results," Arrick said.
Tufts-NEMC's split from Lifespan is amicable by all accounts. Systems "can't be afraid of modifying a relationship if it makes sense for the population you serve," Vecchione said.
Tufts-NEMC, which expects to break even in 2003, plans to focus on local affiliations. Lifespan, which also plans to rid itself of its visiting nurse association and hospice services, will concentrate on its acute-care business.
The initial talks took place this spring when Lifespan's new chairman decided to review its operations. Although Lifespan has pared corporate holdings, it will maintain contracts with the visiting nurse and hospice organizations and with Tufts-NEMC, which has agreed to continue to purchase its information technology, laundry and insurance services from Lifespan.
Both O'Donnell and Vecchione agree that although their official union is ending, both sides experienced long-lasting benefits.
Lifespan members use Tufts-NEMC's liver and heart transplant center, which meant the system did not have to build its own. In return, Tufts-NEMC increased its referral base. Tufts-NEMC was able to improve its equipment with the $8.7 million it annually received from the system. Tufts-NEMC contributed about $40 million each year to the system from its bottom line, which included its payment for services and for participation in the system.
Breakups are more likely to be harmonious these days because they are between sophisticated players, Rice said. "They realize there is no value in acrimonious departures."
But not all separations are so friendly. A couple of years ago, a surge of acrimonious separations between hospitals and systems occurred, including a bitter breakup in San Francisco between 661-bed University of California San Francisco Medical Center and two-hospital Stanford University Health Services. Another nasty split took place between 413-bed Milton S. Hershey Medical Center in Hershey, Pa., and two-hospital Geisinger Health System in Danville, Pa.
Contentious hospital system relationships today are rarer but have not disappeared. Although it looks like a divorce and talks like a divorce, the top officials at New York's Mount Sinai NYU Health insist that they are still merged in spite of what everyone else thinks.
Never mind that in order to be on the safe side of federal antitrust law, the four-hospital system has stopped negotiating managed-care contracts as one, and the office of president and CEO of the merged health system disappeared last spring when a new "campus-centric" focus formally unraveled the 1998 merger. As a result 734-bed NYU Hospitals Center and Mount Sinai Medical Center gave up on crossing a considerable cultural divide and retreated to their respective campuses (June 3, p. 22). It was not a moment too soon, considering the system's former interim president and CEO, Barry Freedman, was summarily removed as president of Mount Sinai last month after 25 years with the hospital (Aug. 26, p. 16).
"It's a reorganization with far less centralization, but it's definitely not a de-merger," said Gary Rosenberg, senior vice president of Mount Sinai. "It is a recalibration of what I think works in our marketplace."
If anything, the recent management shake-up at Mount Sinai strengthened the tenuous relationship between the two organizations, Rosenberg said. "The new management at Sinai recognizes the value of doing some things with NYU Hospitals and also recognizes why it is important to maintain the campus-based focus," he said. "Sometimes when you get new people, it is easier to keep a relationship going, particularly one that is contentious."
Rosenberg's counterpart at NYU Hospitals Center agreed the merger has not unraveled; it has just taken on a new look.
"We still have some significant activities that are provided corporatewide," said Richard Donoghue, NYU's senior vice president. Those activities include information technology, patient financial services, employee benefits, food services and some purchasing activities, he said.
Despite the turmoil, officials on both sides continue to describe themselves as a family of hospitals under a holding company model. The CEOs, presidents and chief financial officers from each hospital and a 28-member board govern the holding company.
"I think healthcare does not operate under normal market circumstances, and we were using a business model that doesn't work well in healthcare," Rosenberg said in explaining the failure of the high-profile mergers of the late 1990s. "Size is not always best for the consumer."
Breaking up isn't hard to do
The split between Tufts-NEMC and Lifespan will be easier than that of some other systems because the hospital kept its own board and a separate budget. Systems that merged assets could find their situation is not as black and white, Arrick said.
Boston's five-hospital CareGroup system, which has merged its debt, has struggled in part because of its flagship, 589-bed Beth Israel Deaconess Medical Center, Arrick said. The hospital has lost more than $118 million on operations in the past two years. CareGroup lost $58.5 million in fiscal 2001 ended Sept. 30, 2001, and $104.8 million in fiscal 2000. In May, it sold 218-bed Deaconess Waltham (Mass.) Hospital to a real estate developer and now is renting back the facility. Further, CareGroup had speculated it would default on $650 million in debt through a technical violation at the end of this month, which added to speculation that the system would crumble (June 17, p. 40).
That thinking has turned around, according to CareGroup officials. "Our current performance is exceeding expectations, and we are in compliance with all bond covenants as of today. We are in a better situation currently than we were last year," said John Hamill, CareGroup chairman, in a written statement.
"The presidents of the CareGroup hospitals continue to talk about solutions to the financial issues common to the system," said Paul Levy, Beth Israel's CEO, in a written statement. "While there were discussions during the spring about restructuring CareGroup, those talks are now on hold. The improved financial picture of (Beth Israel) has played an important role in that shift in emphasis." Beth Israel has budgeted for an operating loss of $41 million for the year ended Sept. 30, 2002, but believes it will do better, said a spokeswoman.
CareGroup would not address its specific conclusions and said it will make an announcement on its finances at the end of September, the spokeswoman said.
Taking a good, hard look
While systems are looking for ways to improve their health, the hospitals within them also have taken out their magnifying glass. In Atlanta, Piedmont Hospital currently is reviewing its relationship with eight-hospital Promina Health System in what Piedmont spokeswoman Nina Montanaro called a standard business practice. Promina CEO Bonnie Phipps left in August after 13 months in the job, and Piedmont gained new CEO R. Timothy Stack in November 2001 (Aug. 5, p. 20). "Everything is on the table at this point, but we have no plans right now to leave," Montanaro said. The hospital gradually has decentralized its information system, however, and Montanaro said it would continue to consider reclaiming other operational areas.
Internal scrutiny by some hospital systems has led to their simply selling off flagging hospitals. "The bottom line is everybody is looking at how to survive," said Erica Drazen, vice president of First Consulting Group in Boston. "If you can't make a hospital perform, you shed it."
Hallmark has restructured its own operations, which were full asset mergers from the mid-'90s, since it dropped talks with Tufts-NEMC. In 2001, the system sold its 161-bed Whidden Memorial Hospital in Everett, Mass., and turned its 106-bed Malden Hospital into an ambulatory health center. Not only did market assumptions fail to pan out, but fallout from the Balanced Budget Act of 1997 erased Hallmark's economic margin, Quinlan said.
Tufts-NEMC's changed status could mean the two once again will talk about affiliating. "We've found in today's world, collaborations and working together by contract is the way to go," Quinlan said.
Those affiliations could come under greater antitrust scrutiny, however, warned Michael Bissegger, a healthcare antitrust attorney with Epstein Becker & Green in Washington, who formerly worked in the Federal Trade Commission's healthcare division. Affiliations do not have the baggage of mergers, but there are greater restrictions to prevent market domination. "The less the integration, the less they can do together," Bissegger said.
Some affiliations already have led hospitals to the courts. In 2000, 314-bed Saint Francis Hospital and 249-bed Vassar Brothers Hospital, both in Poughkeepsie, N.Y., settled a claim of price-fixing and dividing the market between them by agreeing to restrict their joint activities. The two overreached their affiliation boundaries outlined in a shared a certificate of need for three new services, Bissegger said.
Currently the 424-bed Susquehanna Health System in Williamsport, Pa., which fully integrated Williamsport Hospital and Medical Center, Divine Providence Hospital and Muncy Valley Hospital, is undergoing similar scrutiny through a lawsuit filed in U.S. District Court in Scranton, Pa. The plaintiff, HMO HealthAmerica Pennsylvania, represented by Bissegger, argues that although the system's governance has not changed, it is acting as if it has merged.
Meanwhile, Lifespan will keep its doors open to other acquisitions. "The rationale for health systems is as strong today as it was a few years ago," Vecchione said. But if it's like other acquiring organizations, it will make sure the fit is right from the start. "They are really going back to basics and doing what they do best--running a local hospital," Federbusch said.