Faced with a lengthy federal moratorium on its core business, MedCath Corp. earlier this year devised a different game plan that focuses on joint ventures with existing facilities instead of building new ones from scratch.
Last week, the specialty hospital chain announced the first tangible result of that new strategy. After building 13 free-standing heart hospitals with physician investors since its formation in 1988, the Charlotte-based company will launch joint ventures to build and manage cardiac-catheterization labs at two North Carolina hospitals: 269-bed Grace Hospital in Morgantown and 81-bed Caldwell Memorial Hospital in Lenoir.
For MedCath, the new paradigm means entirely new partners.
"Obviously the moratorium is out there (and played a role)," said Tom Hearn, president of MedCath's diagnostics division. "But over and above the moratorium, what has happened over the last few years is that we've been increasingly approached by existing providers who have seen studies of quality outcomes (for MedCath's facilities) and are interested in working with us."
Now, instead of signing up physicians to invest in cardiac hospitals that compete directly with local community hospitals, Hearn said, MedCath is more likely to negotiate collaborative deals with those hospitals. "We'll work with them and take our skills and make them available in joint ventures," he said.
The deals with the two North Carolina hospitals were the first of their kind since MedCath announced its new game plan earlier this year in the wake of the 2003 Medicare Modernization Act, which imposed an 18-month moratorium, beginning in mid-November 2003, on any new physician-owned specialty hospital. Some hospitals already under development were exempt from the law.
"If you look at the whole population of about 5,000 hospitals, and the number of those hospitals that would like to have cardiology programs and would be attracted to MedCath, it's a pretty big market," Hearn said. "We're going to have sort of a multifaceted strategy, which may include acquisitions in the future. Most likely, it will (focus on) collaborative joint ventures with existing providers and physicians."
MedCath, he said, is discussing an arrangement similar to those in North Carolina hospitals with "a number of existing hospitals."
Steve Messinger, a consultant with ECG Management Consultants who specializes in physician-hospital relations, said MedCath's emphasis on these joint ventures makes perfect sense. "MedCath can bring a lot of capabilities that hospitals might not have-including an established market brand, quality care and a physician-friendly reputation."
As a publicly traded company, Messinger pointed out, MedCath needs to find some avenue for revenue growth. Barred by the moratorium from building any new specialty hospitals, MedCath officials may have settled on joint ventures as a way to boost that quarterly growth. "(Top MedCath officials) probably looked around and said, `We need to show quarterly growth rate of 20% or so-we've got to do something."'
For his part, Hearn downplays the impact of the moratorium on specialty hospitals, which is scheduled to expire in June 2005. He said the new strategy makes good business sense, regardless of what happens with the moratorium, which could be extended or made permanent by Congress.
"We don't know whether the moratorium will be permanent or not, but this is a logical extension of our strategy," Hearn said.