Changes unleashed by health reform are pushing Franciscan St. Francis Health’s expansion into Hamilton County—in addition to the obvious pull of the area’s well-heeled population.

The hospital system that dominates the southern side of Indianapolis will invade the northern suburbs by leasing an 89,000-square-foot building on North Meridian Street in Carmel. That’s just up the road from the Indiana University Health North Hospital, formerly called Clarian North Medical Center. It’s also about halfway between St. Vincent Carmel Hospital and St. Vincent Heart Hospital.

Franciscan St. Francis will spend $23 million to convert the three-story building to its uses: a six-bed inpatient unit, inpatient and outpatient surgical suites, an imaging center, facilities for cardiac testing, physical therapy, oncology infusion therapy and study of sleep disorders, as well as physician offices.

North-side patients don’t even account for 10 percent of Franciscan St. Francis' current revenue of $1.7 billion. But Hamilton County residents have median household incomes of $86,000—the highest in the state and 22nd-highest in the nation—and most have generous health insurance sponsored by their employers.

Those employers, however, are crying "uncle" after their costs for providing health benefits more than doubled in the past decade. To get a handle on costs, some employers are looking to contract directly with hospital systems in exchange for lower rates, or to sign on to health insurance plans that restrict workers’ access to a narrow network of low-cost providers.

Franciscan St. Francis wants to play that game—but to do so, it needs to be able to provide convenient access to employees all around the city.

“We’re seeing the marketplace change a little bit,” said CEO Bob Brody, adding, “We want to create access points across the marketplace that are convenient for patients, that are affordable for patients, and that ensure the St. Francis standards of care.”

In addition, the 2010 health reform law instructed the federal Medicare program to contract with health care providers that form themselves into accountable care organizations—and to give those organizations a bonus if they reduce costs and improve quality. Many private health insurers are following suit.

To qualify as an accountable care organization with the federal government, a group of hospitals and doctors must take responsibility to care for at least 5,000 Medicare recipients, who are all 65 and older. Other rules for the organizations, however, have yet to be written.

“As we move into our accountable care organization planning and development, it will be important to have a broader geographic presence, spanning the central Indiana marketplace,” Brody said. Franciscan St. Francis currenty operates hospitals in Beech Grove, Mooresville and in Indianapolis, near Interstate 65 and Emerson Avenue.

In addition to spawning accountable care organizations, the health reform law reduced some payments to hospitals and instructed the Medicare program to further moderate spending by not paying for patients readmitted to hospitals shortly after discharge and by making “bundled” payments to hospitals and doctors for major procedures—and letting them argue over how to divvy it up.

Brody, who has publicly criticized the hospital arms race in Hamilton County of the past decade, defended Franciscan’s Hamilton County expansion as a move designed to be much lower in cost than the massive hospitals it will compete against along Meridian Street.

“I’m particularly incensed with health care providers spending hundreds of millions of dollars in markets around the state which are already served by an existing community-based hospital, and the negative impact that has on the cost and quality of care,” he said. “In this situation, we’ve been very, very intent on developing a cost-effective alternative in what is certainly an over-served market, but is over-served in a manner that is not consistent with the changing economics and the intent of our reform legislation.”

In other words, Franciscan St. Francis thinks its facility will be the low-cost option on the block.

Brody also noted that Franciscan St. Francis has seen increasing business from north-side patients in the past year, particularly in such areas as orthopedics, cancer and heart services.