A provision in a 1998 affiliation agreement between Lee Regional Medical Center in Johnstown, Pa., and Pittsburgh-based UPMC Health System may allow the former board of the western Pennsylvania hospital to buy itself back and block its sale to its crosstown rival.
In late May, five-hospital Conemaugh Health System in Johnstown, parent company of 339-bed Conemaugh Memorial Medical Center, offered to pay $58 million to buy 212-bed UPMC Lee Regional from the 10-hospital system. But the board of Lee Regional Health System, which transferred sponsorship to UPMC in a whole-asset merger that was completed last year, voted to exercise its right under the agreement to seek an accounting of how much money UPMC has invested in it to possibly regain control.
On June 3, Lee Regional Health System's board sent a letter to UPMC seeking a tally of all contributions, subsidies, gifts, loans and money transfers from UPMC to Lee Regional.
Pittsburgh healthcare attorney Daniel Mulholland, who is representing Lee Regional's board, said the board is seeking the information to determine whether it will repay UPMC to regain the hospital, a right granted in the affiliation agreement.
"They want to know the numbers to see whether they'll be able to operate it themselves," Mulholland said. "Until a fair accounting is completed, they won't know if it's economically feasible."
Mulholland said Lee Regional has 60 days to make an offer from the date it receives the hospital financials from UPMC.
"Buying it back (and going independent) from UPMC would certainly offer an alternative to the people of Johnstown over a sale to Conemaugh," Mulholland said. "And competition's always a good thing. And if the amount that UPMC invested in Lee Regional is less than the $58 million Conemaugh offered, then the difference remains in Johnstown, which is a positive as well."
Lee Regional hasn't fared well financially recently. After recording profits of $6.7 million in 2001 and $3.7 million in 2002, the hospital lost $2.9 million on total revenue of $221.9 million in the fiscal year ended June 30, 2003, according to the American Hospital Directory.
Lee Regional Health System Chairman John Augustine said the board hopes to repurchase the hospital if the price is right. Augustine said UPMC failed to deliver several new service lines that it had promised. And he said once the affiliation agreement's merger finally became effective a year ago, UPMC began charging Lee Regional with an assessment for system overhead charges and costs of subsidizing physician practices.
"We figured if we took those two items out of the equation, we'd have been making money instead of losing it," Augustine said.
George Huber, UPMC's senior vice president of corporate relations and regional programming as well as the system's former general counsel, said the letter did not surprise him. He said Conemaugh officials approached UPMC's board last November with an offer to buy Lee Regional.
"We don't even have a letter of intent yet, but we felt even if we contemplated the sale, we had to notify the board of Lee Regional," Huber said. "It doesn't mean we will sell, but we're contemplating it. And (Lee Regional Health System's board) has the right to regain control if they come up with what UPMC has invested."
Huber said he doesn't know how much that figure represents, but Johnstown sources have estimated UPMC has sunk at least $40 million and perhaps more than $60 million into the hospital in the past six years. Huber said loans UPMC has covered for Lee Regional's physician acquisitions and subsidies, money used to subsidize operations and the bottom line are all to be included in the accounting.
UPMC believes it makes sense to sell to Conemaugh, which would merge the two hospitals, Huber said.
"It makes sense from both a quality and an economic standpoint," he said. "If you consolidate services, you enhance your ability to improve quality and realize cost efficiencies."
He said Johnstown's population is declining and its economy is struggling.
"Anyone who is rational has to consider the benefits to the community of a single strong hospital system rather than two struggling ones that are competing and duplicating services," he said.
Conemaugh Memorial lost $691,000 on total revenue of $544 million in the fiscal year ended June 30, 2003, but reported operating losses for the last three years, most recently $8.7 million, according to the American Hospital Directory. The hospital turned a $438,000 profit in fiscal 2002 but lost $8.5 million in fiscal 2001.
Huber confirmed that UPMC has no choice if the Lee Regional Health System board decides to regain control of the hospital. "But we don't agree it's the best solution," he said.
Richard Salluzzo, chief executive officer and chief medical officer for both Conemaugh Health System and its Memorial Medical Center, said the merger of Johnstown's only remaining acute-care hospitals makes sense.
"We have an eroding demographic base, a population that's dropped from 180,000 in 1970 to 145,000 this year," Salluzzo said. "But we are still overbedded. We have trouble luring physicians here. It's much harder to recruit with two competing systems. The doctors worry about market share. We could recruit doctors much more effectively with a single system."
He said duplication of services continues to prevent the two hospitals from expanding services and competing with out-of-town rivals. He said the two facilities spent more than $400,000 on marketing alone since January, money that could be better spent on patient services. He estimated duplication and waste costs ranged from $7 million to $10 million annually.
"In the final analysis, the right thing for this community is to have one hospital system," Salluzzo said.
Augustine disagrees, saying Lee Regional Health System's board is best equipped to operate the hospital.