Indianapolis hospitals extending reach statewide

The county hospital in Salem will be renamed St. Vincent Salem Hospital now that Indianapolis-based St. Vincent Health
has agreed to lease it for five years, with an option to then buy it.

The agreement, approved by a federal bankruptcy
judge this month, is St. Vincent’s latest attempt to expand its network of central Indiana hospitals to the far reaches
of the state.

And St. Vincent isn’t done.

The 17-hospital network’s talks with Dunn
Memorial Hospital in Bedford are moving forward. And its board is having conversations with as many as 18 other hospitals.

Speer

Kevin
Speer, St. Vincent’s chief strategy officer, said it’s been “chaotic” as the
hospital’s executives have had “more conversations than time to have them.”

And, he added,
“I see it picking up, if anything, in the next 24 months.”

St. Vincent isn’t alone in its statewide
push.

Its biggest rival, Indianapolis-based Clarian Health, closed Jan. 1 on its acquisition of Bloomington Hospital
and its satellite hospital in Paoli. Clarian CEO Dan Evans said the 16-hospital system is now in “digestion mode,”
and not seeking out new hospitals. But the system’s plans call for a broader statewide network of hospitals, maybe even
spilling out of state.

“Just this morning, I’ve received three phone calls” from Indiana hospitals,
Evans said during an interview Jan. 20.

In addition, the state’s third-largest hospital system, Sisters
of St. Francis Health Services Inc., tried for a merger deal last year with Bloomington-based Monroe Hospital. Those talks
broke down in August, but St. Francis is interested in doing partnerships with other hospitals.

Executives of
St. Francis, which is based in Mishawaka, a suburb of South Bend, did not answer questions for this story.

Economies of scale

The reasons for smaller hospitals’ interest
in joining forces with larger hospitals stem from three key factors: They need buying power to negotiate
better reimbursement from insurance plans and lower prices from suppliers; they often need a larger system
to provide enough patients for high-value specialists, such as heart and orthopedic surgeons and cancer
specialists; and a larger financial base makes hospitals more credit-worthy, driving down their borrowing
costs.

The hospital in Salem, known as Washington County Memorial Hospital, didn’t
survive long without a big hospital as a partner.

It had long been affiliated with the Jewish
Hospital in Louisville, a 45-minute drive from Salem.

But five years ago, Washington County decided
“going it alone” would be better, according to documents filed as part of its bankruptcy case. At the same time,
it brought on an OB/GYN physician and an orthopedic surgeon as full-time employees in an attempt to expand those operations.

It just didn’t work. Washington County’s prices for supplies shot up while its weaker hand in negotiations
with insurers pushed its reimbursement rates down. In addition, its rollout of a new computer system did not go well, leading
to big delays in its billing of insurers and patients. In many of those occasions, Washington County didn’t get paid
at all.

When the hospital finally filed for bankruptcy reorganization in June 2009, it had been bleeding $5 million
a year.

St. Vincent, which has been managing the hospital since last spring, has made several painful cuts. It
ended the OB/GYN program, leaving no place in Washington County for women to give birth. It ended its money-losing contract
with the county government to run the ambulance service. It helped get the billing system working properly, but it also cut
more than 40 jobs.

St. Vincent also has poured a lot of money into the hospital to keep it running. No other
hospital in Indiana has gone bankrupt and survived.

“We have really made an investment in rural communities
to make sure that health care can continue,” said Joe Roche, the St. Vincent executive managing the Salem hospital.
He also runs a similar-size hospital for St. Vincent in nearby North Vernon.

St. Vincent will pay $500,000 a
year to lease the Salem hospital. It can then purchase it outright for $3.7 million. Roche said he expects the deal to close
Jan. 31.

Statewide march

Both Clarian and St. Vincent say their
statewide expansions are improving the quality of health care in outlying areas.

They both are using computer
technology to make the patient experience “seamless” as a patient moves from care at rural facilities to the big
Indianapolis hospitals for complex procedures and back to the rural area for recovery and follow-up.

But otherwise,
the way the two systems explain their statewide expansions could hardly be more different.

Evans, looking out
the picture windows of his sixth-floor office in a brand-new building on the Central Canal, can see the sprawling campuses
of Indiana University Hospital and Riley Hospital, both owned by Clarian. Less than a mile north of Evans’ office sits
Clarian’s third downtown hospital, Methodist, which is one of only two major trauma centers serving Indiana.

“Downtown eats capital,” Evans said while sitting behind his wooden desk. “Just look out the window.”

Evans freely admits that Clarian has been adding hospitals to its network, and aggressively building new facilities,
in order to generate profits to support the money-losing downtown campuses and to pull in more patients to send to the downtown
campuses.

It’s been successful. In the first years after Clarian formed in 1997, patient visits to its
downtown hospitals slowly declined. But after building new hospitals in Avon in 2004, Carmel in 2005, and Lafayette in 2008,
as well as buying hospitals in Muncie and Hartford City, the decline reversed itself.

Last year, patient visits
to the downtown hospitals totaled nearly 57,000, the first year they exceeded 2000 levels.

“We’ve
not ceded the suburbs to our competition,” Evans said.

In contrast, Speer heads up St. Vincent’s
strategy from a one-story administrative building tucked away on the east edge of St. Vincent’s flagship campus on West
86th Street. The building lies hidden behind various outpatient medical centers. You have to know it’s there to find
it.

Just like Evans, Speer needs to keep patients flowing into the five hospitals clustered on the 86th Street
campus. But he doesn’t have the profit problem Evans has downtown.

But St. Vincent began expanding to the
suburbs in 1974, meaning it enjoys established profits, especially from its two hospitals in Carmel, where operating margins
are as high as 20 percent.

Suburban hospitals attract the highest proportion of patients with employer-sponsored
insurance, which pays at rates roughly 20 percent higher than hospitals’ costs. That cash flow gives St. Vincent the
resources it needs to extend its presence in Indiana

St. Vincent often has targeted struggling rural hospitals,
as in Salem.

“We do look at it as a ministry. We do look at it as a mission,” said Speer, sitting
at a massive conference room table shaped like a “V.”

But the acquisitions also benefit St. Vincent.
They can generate more patient referrals to its larger hospitals, particularly the St. Vincent Heart Center in Carmel and
OrthoIndy’s Indiana Orthopaedic Hospital, which St. Vincent bought a minority stake in late last year.

St. Vincent also wants to put itself in a position to do more direct contracts with employers, such as providing on-site employee
clinics, as it has at Zionsville Community Schools.

Last, St. Vincent wants to make sure every health insurer,
medical-device company and state legislator must consult with it before doing something new.

“We need to
have a system that you can’t go to market without us, you can’t pass legislation without talking to us,”
Speer said. “For St. Vincent Health as an entity to be viable, we need to be indispensable.”•