How to Stay (or Become) Independent

Philip Betbeze, for HealthLeaders Magazine , January 8, 2010
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Eight months into his job, Medaglia was diagnosed himself with a serious health problem that needed surgery. "I had it done here. All the employees knew it, the docs knew it, and we made sure the community knew it," he says. "It's good enough that a consultant CEO who could go anywhere had it done here."

As a result of these changes, the hospital's daily census went from the low 70s to anywhere from 115 to 120.

As recently as 2007, when discussions began about returning the hospital to independence, Saint Anthony lost $12.4 million. In 2008, the hospital rebounded with a $700,000 positive net margin, and in 2009, the hospital had turned around its finances, producing a $2.8 million positive net margin, says Medaglia.

External engagement
Many independent hospitals may not be able to resist the trend as effectively, however, and indeed, the verdict is still out even for Saint Anthony. As a result, many hospital CEOs are looking to join bigger, more stable hospital systems, as the general consensus seems to be that hospitals' revenue streams will continue to shrink at a time when hospitals need more access to capital than they ever have.

Richard P. Miller, president and CEO of Virtua, a four-hospital system headquartered in Marlton, NJ, says that independent hospitals in his state generally have aging buildings but no capital to construct replacement facilities. "Further, those hospitals have no margins and have desperate need for technology to improve quality and safety," he says. "Virtua is fortunate to be in the position to be spending $125 million in IT in the next two years. Virtua's annual revenue is $1 billion. A small $250 million [annual revenue] operation can't afford that kind of spend."

Virtua, it must be said, is looking to grow through acquisition.

"We're a billion-dollar [annual revenue] health system now, but in five to 10 years that will be a small health system in this country," he says. "There has to be consolidation, and we're looking at opportunities."

He says time is not on the side of independent hospitals that may currently have strong balance sheets but are not doing so well in revenue.

"Will those hospital boards recognize that it's time to move in a new direction? Some small hospitals may decide to stay where they are, which will cause erosion of balance sheet."

But even Miller doesn't feel the need for Virtua to necessarily make outright cash acquisitions. For example, for hospitals that want to retain their identity and a level of independence, service agreements could be an answer. One way is using a larger provider's help with a proven IT solution. Or a service agreement can be designed to improve physician alignment in situations where smaller hospitals need to retain their physicians and aligning certain services with a larger player would be an effective way to do that.

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