Battered by stagnant population growth and blue-collar job loss, Howard Regional Health is merging with Indiana University Health—a deal that reflects the challenges faced by hospitals in Indiana’s outlying cities.

Merger discussions by the Kokomo-based hospital system carried on for two years leading up to the late-May vote by Howard Regional’s board to approve a letter of intent to integrate with Indianapolis-based IU Health. According to the Kokomo Tribune, the merger could be complete by year’s end.

It’s the third hospital system in 10 months that has agreed to become part of IU Health, including Morgan County Hospital in Martinsville and White County Memorial Hospital in Monticello.

Many other hospitals in such cities as Salem, Hartford City, Muncie and Hammond have joined larger Indiana-based hospital systems in recent years.

When all are finalized, IU Health will operate 20 hospitals around the state, from as far north as LaPorte and Goshen to as far south as Paoli and Bedford.

“This is an integration of two not-for-profit hospitals that will provide a premier health-care system for north-central Indiana,” Howard CEO Jim Alender told the Kokomo Tribune. “We can see the future and health-care reform is moving forward.”

Indeed, the 2010 health-care reform law augurs stagnant reimbursement rates and will encourage hospitals to form accountable-care organizations that will manage the health of a population of patients—and be paid based on quality and cost savings, not merely on volume of procedures.

The volume-based model has been highly lucrative for hospitals over the years, but it began to lose steam in Kokomo after 2006. At the end of that year, Kokomo still boasted nearly 48,000 jobs, with nearly a third of them in well-paying manufacturing positions.

By the end of 2009, nearly 8,000 jobs—about one in six—had disappeared, and three-quarters of those losses came in manufacturing. Struggles by Kokomo stalwarts Chrysler and Delphi were chiefly to blame.

The carnage is apparent in Howard Regional’s audited financial reports. In 2006, the hospital system boasted a gain on operations of $10.9 million, or 7.3 percent of all revenue. By 2009, its gain on operations had dwindled to $3.5 million, or 2.2 percent of revenue. (It actually dipped into negative territory in 2008, although that was a bad year for all hospitals.)

Howard Regional has not yet filed its 2010 financial results with the Indiana State Department of Health.

Howard Regional’s overall revenue actually increased $20 million from 2006 to 2009. But with fewer patients in Kokomo having employer-sponsored health insurance—since fewer had jobs—more of the hospital's revenue came from poor-paying government health plans or from patients paying out of pocket. Those payments rarely equal a hospital’s cost of providing care.

The amount of patient revenue coming from profitable commercial health insurance plans slipped from 39 percent in 2006 to 33 percent in 2009.

To be sure, Howard Regional is doing OK financially. It had about 100 days' cash on hand in 2009, an improvement from 2006.

But looming ahead were the need to purchase an electronic medical record system, or have its reimbursement from the Medicare program nipped beginning in 2015. At the same time, a shortage of nurses and the need to employ more physicians kept driving up salary costs.

“Because the population of our primary service area is not expected to grow over the next five years, we plan to expand the geographic area we serve by moving more aggressively  into the counties surrounding Howard County,” hospital executives wrote in 2008.

Three years later, that is still the strategy. Now Howard Regional will just have the extra resources of IU Health to make it happen. IU Health will assume about $50 million in debt from Howard Regional, according to the Kokomo Tribune, but otherwise no money will be exchanged.

“Along with IU Health and Indiana University Kokomo, we will develop a regional health-care plan that this region will need,” Alender told the Kokomo Tribune. “We would help IU Health develop services for north-central Indiana.”