Hospitals seek mergers to save costs

In the last six months, Dan Evans has agreed to acquire three smaller hospital systems. And the CEO of Clarian Health expects
to do more.

But he should also expect to have company. Executives at two other hospital systems operating in Indianapolis — St.
Francis and St. Vincent — say they’re looking at acquisitions more than they were just a year ago.

"We’re having talks, maybe more than we ever have before," said Kevin Speer, chief strategy officer at St. Vincent
Health,
which operates 18 hospitals in Indiana. "We’re in a growth mode."

It’s the same story across the Midwest and the nation, according to hospital analysts. They say size increasingly matters
for hospitals to be able to obtain financing and to make investments in computer systems that can improve efficiency for everyone
in a hospital, whether they wear a business suit or blue scrubs.

Both analysts and executives say hospitals must save money because government programs like Medicare are bound to curb reimbursement
rates and commercial health insurers are pushing back against hospitals’ price increases of recent years.

This year’s turmoil in the financial markets has only pumped up pressure on hospitals.

"Borrowing costs have gone up dramatically. Investment returns have fallen. That’s just accelerating a trend that’s been
going
on," said Jim LeBuhn, a hospital analyst for Fitch Ratings in Chicago. "We’re hearing a lot more noise about organizations
opening dialogue with one another."

There’s even been some talk among Indianapolis’ four largest hospital systems. Bill Corley, CEO of Community Health Network,
said that within the past year or so, some members of Clarian Health’s board talked to members of Community’s board about
a merger.

"They approached us, and our board of trustees basically said there was no interest in a merger," Corley said. He
downplayed
the significance of such talks, saying, "These kinds of discussions go on all the time."

Corley doesn’t foresee a surge in hospital mergers soon, but instead sees more partnerships among hospitals. As an example,
he said, Community built a $10 million data center last year and is now in talks with another hospital to share it. He also
pointed to collaboration among Indianapolis hospitals in the 1990s that dramatically reduced the city’s infant mortality rate.

"We’re always interested in working together," Corley said.

Evans denied knowing about any conversations between Clarian and Community, but said, "There’s constant conversation
all the
time."

Still, he expects Indianapolis to see a cross-town hospital merger in "eight years or less."

"Federal reimbursement will decline. Large and small systems alike will be forced to look at consolidation," said
Evans, citing
changes likely to come from President-elect Barack Obama’s administration. "It falls into the category of Mr. Obvious."

Hospital accountant Ed Abel said that, among local health care professionals, "It’s generally acknowledged that the four
[Indianapolis]
systems will become two systems. It’ll be the Catholics [St. Francis and St. Vincent] and then Community-Clarian."




’90s mergers

Of course, hospital mergers are nothing new to Indianapolis. Clarian itself is the chief product of a merger mania that swept
the city in the 1990s.

Clarian formed in 1996 when Methodist Hospital, Indiana University Hospital and Riley Hospital for Children agreed to join
forces.

Officials at the time predicted $50 million in savings over five years. Evans said they achieved $60 million in three years
and more since then.

Other hospital systems tried to team up as well. In 1994, Corley formed a joint operating agreement between Community and
St. Vincent. But the partnership fell apart after two years because of disagreements over leadership and whether Community
should become a Catholic hospital.

Community then agreed to a merger with St. Francis in 1998 and, when that didn’t work, began to pursue a deal with St. John
‘s Health System in Anderson. St. John’s eventually merged with St. Vincent.

The cultural issues that spoiled the Community-St. Vincent agreement are also the biggest challenge to mergers today, said
Tony Lennen, the former CEO of Major Hospital in Shelbyville, who is now a consultant for Catalyst Healthcare Advisors in
Indianapolis.

"A lot of these mergers have occurred more out of fear or just jockeying," Lennen said. "You have to have a
cultural compatibility
that helps you get through the tough times of grinding through all those tasks of making those systems into one."

Still, Lennen agreed that looming financial and reimbursement pressures will likely push hospitals to merge.

Another reason hospitals in small cities or rural areas are more eager to merge is they want access to the specialists large
hospital systems have on their clinical staffs, said Abel, who is director of health care for Indianapolis accounting firm
Blue & Co.

Patients want to receive as much care as possible near their homes. But small hospitals don’t have enough patients to employ
their own neurosurgeons or cardiologists, for example.

Meanwhile, the Indianapolis hospitals need more referrals from rural hospitals to keep patients flowing through all the new
facilities they’ve built recently.

"The larger hospitals have been very aggressive in this area," Abel said.

Angling for partners

Recently, Clarian has been the most aggressive at acquiring other systems.

Just this year, Clarian officials have signed letters of intent to acquire Bloomington Hospital, Dunn Memorial Hospital in
Bedford and Cardinal Health System, which operates hospitals in Muncie and Hartford City.

None of those deals has closed yet.

In both Muncie and Bloomington, the hospitals agreed to merge with Clarian in part because Clarian’s finances could help them
build new facilities.

Cardinal was in the midst of a $120 million expansion of Ball Memorial Hospital when its CEO, Kelly Stanley, agreed to merge
with Clarian.

Evans has said Clarian will fund the completion of that project as long as it saves money from economies of scale. He predicted
the combined systems would save on bulk purchasing, negotiating insurance contracts and floating bonds.

On the outside looking in on Clarian’s recent deals has been St. Vincent. Speer, St. Vincent’s strategy officer, had talked
to Stanley’s predecessor — who had refused to talk to Clarian — about a merger. But when Stanley, an acquaintance
of Evans’,
was
appointed in August 2007, Clarian was in the driver’s seat.

In Bedford, St. Vincent officials had been trying to sign a five-year lease with Dunn Memorial Hospital and arrange some kind
of partnership. But hospital officials voted in September to have exclusive merger talks with Clarian, which already operates
the city’s other hospital, Bedford Regional Medical Center.

Until Clarian’s recent moves, St. Vincent had been the most active acquirer among Indianapolis hospital systems. St. Vincent
Health is part of St. Louis-based Ascension Health, the largest not-for-profit hospital system in the nation. Ascension also
operates a hospital in Evansville that is not part of St. Vincent.

Since St. Vincent CEO Vincent Caponi arrived in 1998, the system has acquired six hospitals — including a women’s hospital
in
Indianapolis and hospitals as far afield as North Vernon and Frankfort.

"We already have a significant presence throughout the state," Speer said. "We definitely have a statewide
strategy."

Not to be left out of this game, Bob Brody, CEO of St. Francis, said his system
is interested in acquiring smaller hospitals.

"We’re more interested in acquisitions," Brody said. He manages several of the 13 hospitals owned by the Sisters
of St. Francis
Health Services Inc., based in Mishawaka. "We are positioned to respond to opportunities in markets familiar to us and
perhaps
new to us."