Physicians are angling to buy stakes in two struggling Midwest hospitals, believing that physician investment and management paired with not-for-profit healthcare partners can get better results.
An entrepreneurial family physician is leading an effort to restructure 167-bed Deaconess Hospital in Cincinnati as a for-profit joint venture with the hospitals not-for-profit parent, and a Rochester Hills, Mich., urologist has formed a corporate organization poised to take over 166-bed North Oakland Medical Centers in Pontiac, Mich., a deal that hinges on significant investment by six-hospital McLaren Health Care Corp.
Deaconess is headed toward a deal in which a group of about 100 physicians would purchase a 40% stake in the hospital, while the other 60% would remain with Deaconess Associations, which operates the hospital and 24 nursing homes, according to physician Michael Barber, who would serve as the hospitals chief executive officer.
The strategy, Barber said, is driven by an erosion of the hospitals referral base as the areas largest physician groups have been acquired by other hospitals and systems. We really wanted a model appealing to individual primary-care physicians and specialists, Barber said. As the market has consolidated, its left a lot of the small practices on the fringes.
The combination of physicians holding a financial stake in the hospital and having a greater voice in how its run, Barber said, should yield a financial turnaround because it will create a place where they feel more comfortable and do more work there because of that.
In November 2007, four-hospital Health Alliance of Greater Cincinnati acquired Greater Cincinnati Associated Physicians, a 31-member group. Barber himself previously was CEO of Group Health Associates, a group of about 100 physicians that was acquired in 2005 by TriHealth, a two-hospital network in Cincinnati.
Barber currently is chief medical officer and vice president for business development for YourCity.MD, a privately held company that maintains city-specific online physician directories for patients looking for providers. He also is on the board of directors and holds shares in CareGuide, a provider of health management services for health plans, which reported a $15.3 million loss in 2007. CareGuide acquired a similar company of which Barber had been CEO, the Haelan Group, in 2006.
The creation of the joint venture with Deaconess is expected to happen sometime in the fourth quarter, Barber said. After an initial interview, he said in an e-mail that he was asked not to speak to the media and referred questions to Deaconess Hospitals marketing director, who did not return calls. Deaconess Associations 2007 annual report logged hospital revenue of $59.3 million and a total operating loss of $5.5 million, a result that includes its long-term-care facilities. The hospital lost $5.2 million in 2006, according to its Form 990 filed with the Internal Revenue Service.
In Michigan, North Oakland Medical Centers has been struggling badly. The hospital suffered an operating loss of $13.4 million in 2007 and had just 18 days cash on hand at the end of the year, according to Standard & Poors. The hospital missed a payment in March on $38 million in bonds issued under a lease agreement with the city of Pontiac. The Pontiac City Council on June 26 agreed to sell the hospital property to Oakland Physicians Medical Center, a limited liability corporation formed by a consortium of physicians led by urologist Anil Kumar.
A spokeswoman for the hospital referred calls to President and CEO John Graham, who did not return several messages left with his assistant.
Kumar said that the physicians are willing to invest as much as $6 million toward the total cost of the transaction, which he believes may be in the ballpark of $11 million, with $3 million owed to the Pontiac Hospital Finance Authoritywhich the cash-strapped city created to issue bonds for the hospitaland $6 million for the hospitals equipment and licenses.
Flint, Mich.-based McLaren has agreed to contribute about $5 million and assume as much as 30% ownership in the hospital, said Kevin Tompkins, McLarens vice president of marketing. McLaren last year acquired 160-bed POH Regional Medical Center in Pontiac, a market that also includes Trinity Healths 403-bed St. Joseph Mercy Oakland.
Kumar said that he and his partners have studied North Oakland Medical Centers numbers and determined a modest increase in volume can make the hospital profitable, blaming the hospitals predicament on lax administration, low morale and union rules standing in the way of employee accountability. The deal is expected to go forward after the hospital files for bankruptcy, probably in the next couple of weeks, Kumar said.