The far-reaching University of Pittsburgh Medical Center exited the Johnstown, Pa., hospital market last week, leaving it a one-hospital town and making four-hospital Conemaugh Health System the third-largest hospital system in Western Pennsylvania.
Conemaugh, the parent company of 339-bed Conemaugh Memorial Medical Center in Johnstown, paid UPMC $46.8 million plus approximately $1.25 million for inventory to acquire 212-bed UPMC Lee Regional. The signing of a consent decree last month and the closing on Aug. 1 culminated a months-long struggle in which UPMC Lee hoped to regain independent control after seven years under the UPMC corporate umbrella (Sept. 6, 2004, p. 17). UPMC settled the legal dispute with Lee's foundation in February, agreeing to pay $9.5 million to support community endeavors, said Jane Duffield, a UPMC spokeswoman.
Although it will still maintain two hospital sites with two emergency rooms, Conemaugh is merging UPMC Lee and Memorial under one license. To date, 974 former UPMC Lee employees have applied for jobs, and Conemaugh offered 912 of them positions, a spokeswoman said.
The consent decree negotiated by Pennsylvania Attorney General Tom Corbett resolved his antitrust concerns by requiring Conemaugh to go into binding arbitration if contract negotiations for inpatient and outpatient services break down. The system also must allow health plans to purchase hospital services without having to buy other healthcare services from the Conemaugh system and it must allow qualified physicians in the area to apply for privileges. Separately, Conemaugh also agreed to become part of UPMC Health Plan's provider network.
"We came away with what we think was a very workable consent decree," said Scott Becker, chief executive officer of Conemaugh and its flagship hospital. "The relationship with UPMC is very positive." Becker noted that UPMC and Conemaugh are in a joint venture for cancer services. "They recognize for a referral process that (Johnstown) is too far a reach for them," he said.
Highmark Blue Cross and Blue Shield, by far the region's largest insurer, never formally took issue with the proposed acquisition, Becker said. It probably didn't hurt that Becker, prior to his arrival at Conemaugh in May, was Highmark's vice president of strategic planning and provider strategy. Before that he worked in mergers and acquisitions at UPMC.
Highmark spokeswoman Denise Grabner noted that Highmark is in the midst of contract negotiations with Conemaugh. "We're hopeful that the hospitals up there will get some sort of economies of scale by merging together and that they will also ensure that there is no duplication of services between the two hospitals," Grabner said.
For UPMC Lee, any cost-cutting could only help the financially foundering facility. Data provided by the Pennsylvania Health Care Cost Containment Council show that in the fiscal year ended June 30, 2004, the hospital lost $9.5 million in operations on $86 million in operating revenue -- a negative 11% operating margin. With a net loss of $8 million, the hospital posted a total margin of negative 9%.
Meanwhile, for the six months of this fiscal year ended June 30, Memorial earned $14 million from operations on $245 million in net revenue, according to unaudited data supplied by the hospital.
UPMC does not provide financial data on individual hospitals, but declining population and utilization rates in the market indicate "why Johnstown should be a one hospital city," Duffield said. Inpatient discharges from UPMC Lee's service area between 1994 and 2004 declined 17.6% while the population decreased 8.9% over the same period, according to data from the state cost-containment council.