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Troubled economy fueling hospital deals

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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.”

 

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  1. Cramer agrees...says don't buy it and sell it if you own it! Their "pay to play" cost is this issue. As long as they charge customers, they never will attain the critical mass needed to be a successful on company...Jim Cramer quote.

  2. My responses to some of the comments would include the following: 1. Our offer which included the forgiveness of debt (this is an immediate forgiveness and is not "spread over many years")represents debt that due to a reduction of interest rates in the economy arguably represents consideration together with the cash component of our offer that exceeds the $2.1 million apparently offered by another party. 2. The previous $2.1 million cash offer that was turned down by the CRC would have netted the CRC substantially less than $2.1 million. As a result even in hindsight the CRC was wise in turning down that offer. 3. With regard to "concerned Carmelite's" discussion of the previous financing Pedcor gave up $16.5 million in City debt in addition to the conveyance of the garage (appraised at $13 million)in exchange for the $22.5 million cash and debt obligations. The local media never discussed the $16.5 million in debt that we gave up which would show that we gave $29.5 million in value for the $23.5 million. 4.Pedcor would have been much happier if Brian was still operating his Deli and only made this offer as we believe that we can redevelop the building into something that will be better for the City and City Center where both Pedcor the citizens of Carmel have a large investment. Bruce Cordingley, President, Pedcor

  3. I've been looking for news on Corner Bakery, too, but there doesn't seem to be any info out there. I prefer them over Panera and Paradise so can't wait to see where they'll be!

  4. WGN actually is two channels: 1. WGN Chicago, seen only in Chicago (and parts of Canada) - this station is one of the flagship CW affiliates. 2. WGN America - a nationwide cable channel that doesn't carry any CW programming, and doesn't have local affiliates. (In addition, as WGN is owned by Tribune, just like WTTV, WTTK, and WXIN, I can't imagine they would do anything to help WISH.) In Indianapolis, CW programming is already seen on WTTV 4 and WTTK 29, and when CBS takes over those stations' main channels, the CW will move to a sub channel, such as 4.2 or 4.3 and 29.2 or 29.3. TBS is only a cable channel these days and does not affiliate with local stations. WISH could move the MyNetwork affiliation from WNDY 23 to WISH 8, but I am beginning to think they may prefer to put together their own lineup of syndicated programming instead. While much of it would be "reruns" from broadcast or cable, that's pretty much what the MyNetwork does these days anyway. So since WISH has the choice, they may want to customize their lineup by choosing programs that they feel will garner better ratings in this market.

  5. The Pedcor debt is from the CRC paying ~$23M for the Pedcor's parking garage at City Center that is apprased at $13M. Why did we pay over the top money for a private businesses parking? What did we get out of it? Pedcor got free parking for their apartment and business tenants. Pedcor now gets another building for free that taxpayers have ~$3M tied up in. This is NOT a win win for taxpayers. It is just a win for Pedcor who contributes heavily to the Friends of Jim Brainard. The campaign reports are on the Hamilton County website. http://www2.hamiltoncounty.in.gov/publicdocs/Campaign%20Finance%20Images/defaultfiles.asp?ARG1=Campaign Finance Images&ARG2=/Brainard, Jim

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