Clarian hospitals in Avon, Carmel turn corner after big losses

Clarian health officials say the only way they can keep operating their medical centers downtown is to support them with
profitable suburban hospitals.

So far, it seems Clarian is on the right track. As Clarian moves forward with a new, $180 million hospital in Fishers, its
two existing suburban hospitals are starting to make money.

Clarian West Medical Center in Avon started writing black ink on its books this year, about 2-1/2 years after its opening
in December 2004, according to financial results released last month. That's 1-1/2 years ahead of schedule.

Challenges remain at Clarian North in Carmel, where patient volumes have lagged and staffing costs have soared since the
hospital opened in December 2005. But that hospital's losses have narrowed this year, totaling $12.4 million through Sept.
30, as compared with $30.2 million during the first nine months last year.

Clarian CEO Dan Evans said Clarian North is operating in the black so far this quarter, and he expects it to be profitable
throughout 2008.

"What we were concerned about was being able to operate north and west financially successfully," Evans said in
an interview. "And I think we've demonstrated that we can do that."

Reaching profitability in two to three years is normal for new hospitals, although different hospitals can vary widely, said
Bill Thompson, managing partner of Hall Render Killian Heath & Lyman, an Indianapolis law firm that serves health care
clients nationwide.

"It's probably as expected," said Thompson, who does not represent Clarian. "Certainly, losing $12 million
is not easy to take. But I think Clarian has a long-term plan and they have incorporated or projected those losses early on."

Clarian North has struggled more than Clarian West. Located at 116th and Meridian streets, the hospital is competing for
patients with St. Vincent Indianapolis Hospital on West 86th Street, Community Hospital North on East 82nd Street, and Riverview
Hospital in Noblesville.

During the hospital's first six months, inpatient volumes ran 20 percent behind Clarian's projections and revenue
lagged by $14 million, according to a 2006 report by Standard & Poor's credit analyst Brian T. Williamson.

In addition, Clarian officials were surprised how many of its Clarian North patients wanted to have complex procedures done
there, rather than at Clarian's hospitals downtown. That has forced Clarian to recruit more specialized doctors and nurses–such
as those focused on cardiology–to Clarian North.

"When you get to those more specialized services, it's more expensive," said Ed Abel, director of health care
services at Blue & Co., an Indianapolis accounting firm.

Long-term strategy

The two suburban hospitals are still a small part of Clarian's total operations, accounting for 9 percent of revenue
during the first nine months of this year. The two hospitals captured $183 million of Clarian's $2 billion in revenue.

But the suburban hospitals are key to Clarian's long-term plans. Evans wants to follow the example of such hospitals
systems as the Cleveland Clinic, the Mayo Clinic and the University of Pittsburgh Medical Center. Those systems have as many
as 16 hospitals, with those in suburban areas generating profits that support the urban, academic hospitals.

Such hospitals, in addition to spending resources to train medical residents, treat some of the sickest and most injured
patients. And more and more, such hospitals treat patients who are covered by Medicare or Medicaid–government programs that
pay less than private health insurers–or not at all.

Evans said more than half the patients at Clarian's downtown hospitals–which include Methodist Hospital, Indiana University
Medical Center and Riley Hospital for Children–pay with Medicare or Medicaid.

Suburban hospitals, by contrast, are strategically located to attract middle-class patients with employer-sponsored, private
insurance. That's where the profits are today in health care.

And Clarian isn't the only one trying to take advantage. Its new hospital will be just off Interstate 69 at Exit 10.
Within a few dozen yards stands one of Community Health Network's medical office pavilions. And across the street, St.
Vincent Health is building a free-standing emergency department and medical offices.

Those hospital systems–Indianapolis' three largest–have all studied the same demographic data. Fishers and nearby Noblesville
each have been growing 7 percent per year, according to special estimates by the U.S. Census Bureau.

"It's the fastest-growing market in the state, with very lucrative demographics," Abel said.

Clarian plans to build a hospital worthy of the market. The 250,000-square-foot facility will include a sleep center, a fitness
center, gardens, water features and walking trails, which will be open to the public. The hospital is scheduled to open in
2010.

Its price tag of $720 per square foot is double the norm for new hospitals, said Monte Hoover, chairman of BSA LifeStructures,
the Indianapolis architectural firm that will oversee engineering and construction of the facility.

Judged by its 40 beds, Clarian's Fishers is more than double the typical cost for hospitals, which can run $2 million
per bed, said Thompson, the health care attorney.

"The cost of that building is certainly high," he said. "It's a big deal. It's a significant capital
cost."

Finding the resources

Like Clarian West and Clarian North, the Fishers hospital will operate as a for-profit entity, with physicians putting up
some of the cash for investments. Evans said he foresees physicians' owning roughly one-third of the hospital.

Clarian West has 20-percent physician ownership, Clarian North 36 percent.

Hospitals sell bonds to pay for construction projects. But Clarian already carries a sizable debt load, according to bond
analysts.

When Clarian issued $382 million in bonds in August 2006, credit analysts rated them favorably, but expressed concern about
the hospital system's aggressive building campaign.

The Fishers hospital adds to $1.6 billion in capital improvement projects Clarian has announced for the years 2006 to 2010,
according to a report by Moody's Investors Service.

"While Clarian's strategies to build hospitals in the downtown, suburban and regional areas should grow market share
in the long run, we believe the scope and timing of these large projects poses risks associated with both the construction
and initial startup phase," wrote Moody's analysts Beth Wexler and Lisa Goldstein in August 2006. The New York research
firm has issued no new reports on Clarian.

Evans brushed off concerns about Clarian's ability to add the Fishers hospital to Clarian's books.

"We know we've got the money," he said, adding, "The bonding agencies are very much aware of our expansion
plans and recognize the necessity of them."

Clarian has $1.5 billion in cash and investments but also carries $1.4 billion in debt. The system reduced its debt in the
last nine months by $30 million while also boosting its profit by $40 million.

But starting up the suburban facilities has clearly taxed Clarian's finances. Its operating margin has been just 1.3
percent during the first nine months of this year, down from nearly 1.8 percent in 2004.

Evans expressed more concern about attracting the management talent and medical staff needed to make the new hospital successful.
However, he said the performances of Clarian West and Clarian North have assuaged most of his concerns.

"If it were a year ago, I would have said I'm not really sure," he said. "But we've demonstrated to
ourselves that we can do it, that a very high-quality work force will come work for us."

Days before announcing details of the Fishers hospital on Nov. 30, Clarian formally backed away from a proposal it had floated
to build a hospital in Muncie. Evans said the Muncie project was simply one of "land development." But he did acknowledge
that Clarian needs to focus on one project at a time.

"We've got to do well what we've started to do," he said.