Liberty Hospital, a public hospital serving the northern suburbs of Kansas City, Missouri, has remained independent since opening nearly 50 years ago.
That status may be about to end.
The hospital, a 200-bed facility with 1,900 employees and managed by the county, is close to signing a non-binding letter of intent to affiliate with Kansas City, Kansas-based University of Kansas Health System.
The hospital’s board, a group of six publicly elected officials with six-year terms, began discussing system-affiliation opportunities earlier this year, as the hospital aimed to capitalize on significant population growth in northern Missouri. Neighboring Platte County is the fastest-growing county in the state.
A health system partner would allow Liberty to expand its reach by adding more services and boosting its clinician recruitment efforts, said Dr. Raghu Adiga, president and CEO. “We want to take advantage of the population growth before someone else does,” he said. “We are not in any dire financial straits, but we don’t like the trajectory of reimbursement not keeping up with wage growth and other costs.”
Liberty Hospital recorded an estimated operating margin of 2.39% in 2022, according to Medicare cost reports compiled in Modern Healthcare's Data Center. The estimated operating margin is based on Medicaid and CHIP Payment Access Commission's definition of net patient revenue minus operating expenses.
If the plans come to fruition, Liberty would be among a group of state- and county-owned hospitals that have recently announced or completed health system affiliations with nonprofit health systems. Community hospitals are seeking health system affiliations to expand their service offerings, while health systems can benefit by directing lower-acuity care to community hospitals.
Last month, St. Louis-based Mercy Health took over operations of Perry County Memorial Hospital and Perry County Health System in Perryville, Missouri. Also last month, Salinas (California) Valley Health inked a letter of intent to manage and operate Hazel Hawkins Memorial Hospital in Hollister, California. In September, Lompoc Valley Medical Center in California’s Central Coast said it has started to search for health system partners.
Nearly 62% of the country’s 5,157 acute-care and speciality hospitals were part of health systems as of May 2023, according to the American Hospital Association. Two decades ago, the share of system-owned hospitals versus independent facilities was close to a 50-50 split.
Meanwhile, the number of government-owned hospitals has declined to 960 as of 2023, down from 1,350 in 1995, according to AHA data.
About a third of Juniper Advisory’s current clients are government-owned hospitals, said Rex Burgdorfer, a partner at the nonprofit hospital merger and acquisition advisory firm. “Usually, these deals are taking place in rapidly growing areas,” he said. “Hospitals want to offer the greatest number of services as possible within their markets. That’s hard to do absent the coordinated regional approach of a partner who can assist in recruitment and retention.”
Regulatory scrutiny varies based on how competitive the market is, but generally, regulators are more sympathetic given that government-owned hospitals may have to cut services without the financial backing of a health system.
Under these types of system-affiliation agreements, health systems usually commit to investing in a hospital’s infrastructure and equipment, such as its electronic health record. County- or state-owned hospitals typically generate some of their revenue from public funding, which generally wanes when larger systems step in.
Although smaller hospitals may have to defer to a system board regarding day-to-day operations management, they can benefit from improved negotiating leverage with insurers and suppliers, treating more commercially insured patients, centralized recruitment and retention efforts and keeping more care at their hospital with the help of health-system employed specialists.
“County-owned hospitals are dealing with inflation, rising interest rates, staffing challenges and the economic headwinds all hospitals are facing, in addition to the challenges of typically having a higher concentration of government payers that provide lower levels of reimbursement,” said Rick Kes, a healthcare senior analyst at RSM, an accounting firm. “Payer-mix challenges make everything harder.”
Meanwhile, health systems can benefit by directing more lower-acuity care to community hospitals to free up beds for more complex and lucrative procedures. Larger systems could also take advantage of supplemental payment programs, such as the 340B drug discount program, if the community hospital disproportionately treats low-income residents.
Vero Beach, Florida-based Indian River Medical Center likely would have closed if Cleveland Clinic hadn’t taken over the county-owned hospital in 2019, said Marybeth Cunningham, chairwoman of the Indian River County Hospital District. Indian River started looking for a health system partner in mid-2017 as its financial status deteriorated, in part because it lacked leverage in negotiations with commercial payers, Cunningham said. The hospital also struggled to maintain aging infrastructure, including an outdated electronic health system, she said.
As part of the agreement, Cleveland Clinic said it would invest $250 million in Indian River over a 10-year span and help the hospital transition to Epic's electronic health record. Cleveland Clinic said it would maintain maternity, pediatric, gynecology, behavioral health, cardiovascular, oncology and gastroenterology services at Indian River for at least 10 years, per the agreement. The health system took on financial responsibility for indigent care, which had been publicly subsidized.
Cleveland Clinic did not provide an investment estimate since the 2019 agreement.
“At one point during COVID, almost 60% of our nursing staff were made up of travel nurses. The hospital would’ve had to shut down if it wasn’t for Cleveland Clinic,” Cunningham said.
Cleveland Clinic has since helped Indian River add services, including breast cancer treatment, stroke care and intensive outpatient mental healthcare, and the hospital-at-home program has grown rapidly, she said. “Anybody that runs an independent hospital ought to be looking at health system partnerships,” Cunningham said.