Hospitals fight to hold on to independence

When Underwood-Memorial Hospital in Woodbury and the South Jersey Health System of Vineland announced their merger agreement this month, the deal was pegged as an example of a new round of hospital consolidation that could eliminate the region's remaining independents.

Financial pressures from government and private insurers to deliver better care for less money, coupled with the current downturn in health-care spending caused partly by the weak economy, have forced some institutions to consider whether the time has come to give up their cherished independence.

"I think in the next few years the economic environment is going to be extremely hostile to these smaller places," said Alan Zuckerman, president of Health Strategies & Solutions, a Philadelphia consulting firm.

"I don't think they can reasonably survive as independent entities," Zuckerman said. "I understand they don't feel that way about it."

He added that the time frame for independents was "no more than five years, likely less than that."

In interviews last week, chief executive officers of several community hospitals expressed confidence that the members of their boards would fight to stay independent.

"They like the idea of being able to control the strategic priorities," even while "recognizing that it's a pretty tough landscape," said Michael J. Duncan, CEO of Chester County Hospital.

An Inquirer comparison of recent financial data from independent hospitals and several health systems found that independents had weaker revenue growth and narrower profit margins from operations, a key measure of how efficiently a hospital provides services. The measure excludes income from investments.

Few independent general hospitals remain in the Philadelphia area. Most joined systems during a wave of consolidations in the 1990s.

The largest holdouts tend to be institutions relatively far from Philadelphia, such as Doylestown Hospital; Grand View Hospital in Sellersville, Bucks County; and Chester County Hospital in West Chester. Their locations have provided some insulation from the competition of powerful academic medical centers in the city, such as the Hospital of the University of Pennsylvania and Thomas Jefferson University Hospitals.

Montgomery County's Holy Redeemer is close to the city, but it is unusual because it has diverse operations beyond its 263-bed hospital in Meadowbrook. There are three small independent hospitals in the city itself: Kensington, St. Joseph's, and Roxborough.

Extraordinary circumstances enabled Lower Bucks Hospital in Bristol, with operating losses of nearly $20 million over the last five fiscal years, to emerge from bankruptcy this month as an independent.

Lower Bucks exited bankruptcy with virtually no debt because State Sen. Robert "Tommy" Tomlinson (R., Bucks) secured half the county's portion of gambling taxes from Parx casino's table games to make payments on $14 million in new bonds. Part of that bond issue by the Redevelopment Authority of Bucks County was used to pay off about 35 percent of the $25 million Lower Bucks Hospital owed to bondholders from a 1992 issue.

Lower Bucks' property serves as collateral for the $14 million in debt, but the debt is to be paid solely from gambling proceeds.

Representatives of Lower Bucks' closest competitors, St. Mary Medical Center and Aria Health Bucks County, did not respond to requests for comment.

Lower Bucks CEO Albert Mezzaroba said the hospital received the help because it served the most economically "vulnerable citizens of the county," providing a significant amount of charity care.

With those people in mind, the hospital board declined to sell Lower Bucks during bankruptcy because "there was no potential buyer who would have kept us open as a hospital," Mezzaroba said.

William E. Aaronson, a professor and health-care expert at Temple University, said Lower Bucks' heavy reliance on patients receiving government aid would make it hard for it to return to profitability.

"They are the de facto public hospital in Bucks County," Aaronson said.

Underwood-Memorial's decision to join South Jersey Health System Inc. eliminated the last remaining independent hospital in Philadelphia's South Jersey suburbs.

Eileen K. Cardile, Underwood's chief executive, described the merger as preparation for an anticipated time when "the payer, whether a federal or a commercial payer, is not willing to pay unless there's low cost and high quality." Being part of a larger system helps, she said: "The larger you are, the more you learn from each other."

Doylestown Hospital's CEO, Richard A. Reif, insisted last week that the highest levels of quality were achievable as an independent, and that merging is typically "an economic decision that's premised on the pressure the providers can put on the insurers" to get better rates.

Doylestown is unusual in that it is owned by a community group, the Village Improvement Association of Doylestown, as opposed to being a freestanding nonprofit entity.

"That doesn't sound like a group that wants to give up control," said Michael D. Rosko, a professor of health-care management at Widener University.

But Doylestown's above-average reliance on Medicare could make it vulnerable, Rosko said: "With potential Medicare cutbacks down the road, that could be really threatening to them. That could be the thing that pushes them over."

Reif said Doylestown Hospital has a demonstration project with the Centers for Medicare & Medicaid Services "that dramatically improves outcomes and saves money."

Moody's Investors Service, however, has a negative outlook on $139.4 million of Doylestown Hospital debt, citing erratic operating performance during the last five fiscal years and a substantial decline in inpatient admissions during that period. Strengths, according to Moody's, include strong market share in the wealthy Central Bucks area and proactive moves by management to reduce expenses.

Moody's also has a negative outlook on Chester County Hospital, which recently borrowed $37 million from Fulton Bank for a new building after skipping a planned bond offering in the spring because interest on the bonds would have been more than 7 percent. The interest rate on the five-year Fulton loan that can be rolled over is 3.25 percent, chief financial officer Kenneth Flickinger said.

Duncan, the hospital's CEO, discounted the concerns Moody's raised in its report last month, citing the New York credit-rating agency's lack of rigor in giving top ratings to complicated mortgage-related bonds during the housing bubble.

"I think they are doing what is sort of natural," Duncan said, "they are overcorrecting."