DENVERSix Kentucky hospitals owned by one of the largest Catholic health systems are striking out on an ambitious expansion plan that its executives say hinges on aggressive local consolidation.
Catholic Health Initiatives, Denver, unveiled plans in mid-June to create a subsidiary health system by January 2008 to oversee six Kentucky hospitals. The move, officials contend, was not fueled by weak performance or plans to divest the half-dozen hospitals, but instead will position the newly created Kentucky system for growth and strengthen its half-dozen hospitals already healthy financials.
We didnt come together because of survival, said Eugene Woods, president and chief executive officer of St. Joseph Healthcare, which includes three of the six CHI hospitals involved in consolidation: 343-bed St. Joseph Hospital and 116-bed St. Joseph Hospital East, both in Lexington, and 41-bed St. Joseph Berea (Ky.).
Nor will the union ready the half-dozen hospitals to be spun off, he said. Not at all, Woods said. No chance of that
Kentucky is one of three states that CHI has singled out for greater local consolidation as part of a systemwide push for more coordination, said Gary Campbell, CHI senior vice president for operations. Efforts are also under way in North Dakota, where CHI operates seven hospitals, and Nebraska, where CHI owns five hospitals. Campbell said the Kentucky effort is not preparation for an eventual sale of CHIs assets there. Not at all, Campbell said. Not even remotely. No name or headquarters has yet been selected for the planned subsidiary, he added.
Michael Rowan, CHIs executive vice president and chief operating officer, said the system sees the heightened coordination as a way to leverage its size in markets where CHI has a strong presence. Our strength is being more than just a collection of healthcare providers, Rowan said. We have no particular plans to divest anything in any of those markets. Indeed, in North Dakota and Kentucky rather than divest, wed be more interested in growth, he added.
Under the plan CHIs 52-bed Flaget Memorial Hospital, Bardstown; 87-bed Marymount Medical Center, London; 25-bed Our Lady of the Way Hospital, Martin; and St. Joseph Healthcare will consolidate operations and insurer negotiations and coordinate capital investment, CHI executives said.
Catholic Health Initiatives enjoys the leading market share in Lexington, ratings agency Moodys Investors Service reported in December. And the half-dozen Kentucky hospitals reported strong financial performance in fiscal 2006, which ended June 30, 2006, a review of annual Internal Revenue Service tax filings showed. Fiscal 2006 was the most recent year available.
Flaget Memorial reported the highest margin, 14.6%, thanks to income of $7.9 million off revenue of $54.1 million. Even the lowest reported margin among the proposed partners, at Our Lady of the Way, was a healthy 5.3%, or income of $1.1 million off revenue of
$20.5 million. Three-hospital St. Joseph Healthcare reported a 6.3% margin, or net income of $23.9 million off revenue of $382.1 million last year. And Marymount posted a 9.9% margin last year thanks to net income of $9.1 million off revenue of $92.1 million.
As a regional system, the six hospitals will be better able to move quickly to coordinate construction or capital projects and expand services, said the deals architects. Executives of the Kentucky hospitals said jointly seeking capital from CHI may also strengthen their position as executives in Denver weigh investments across the systems 55 hospitals in 17 states.
Virginia Dempsey, Marymounts CEO, said her 87-bed hospital stands a better chance when recruiting specialists to London, Ky.located roughly 75 miles south of Lexingtonwith the promise of more patients than a regional health system can deliver. We have been unable to attract an ear, nose and throat doctor, she said. Marymount gained access to radiology subspecialists after the soon-to-be consolidated Catholic hospitals jointly contracted with a Lexington-based radiology group in September 2006, she said. Marymount lost a local radiologist in the fall of 2005 and relied on temporary services until signing on to the joint contract a year later, Dempsey noted.
Hospital executives said they expect the integration will help wipe out waste and boost savings as the six hospitals find ways to consolidate operations or use their combined size to win better leverage in negotiations with suppliers, providers and insurers. It stands to reason that we can consolidate resources that will benefit smaller, rural hospitals, said Flagets president and CEO Bruce Klockars.
Consolidation efforts under way for the past two years have produced results, said Kathy Stumbo, the president and CEO of Our Lady of the Way, a critical-access hospital, citing a joint investment to digitally archive medical images. Over six years, the half-dozen hospitals are projected to save $885,000 by contracting jointly, rather than negotiating individually, according to CHI.
Woods said talks under way may soon bring a seventh hospital into the system: the not-for-profit Mary Chiles Hospital in Mount Sterling, Ky. St. Joseph and 63-bed Mary Chiles, a stand-alone hospital, entered into exclusive negotiations in September 2006 and signed a definitive agreement on July 10 that requires St. Joseph to build a Mary Chiles replacement hospital. The deal is expected to close Aug. 1.