The Impact of Physician-owned Limited-service Hospitals on Community Hospitals Excerpts from Case Studies Conducted by M

1. The Impact of Physician-owned Limited-service Hospitals on Community Hospitals Excerpts from Case Studies Conducted by McManis Consulting: Wichita, KS Lincoln, NE Black Hills, SD Oklahoma City, OK

2. Four case studies illustrate the impact of physician-owned limited service hospitals on community hospitals and the patients they serve. Lost patients and revenues lead to: • A substantial decline in financial performance • Actions to cut costs in other areas: • Lay-off staff • Cutback subsidized services • Programs most at risk -- behavioral health, trauma, outpatient clinics, hospice, home health, health education/wellness, outreach, community medical education • Actions to protect/rebuild affected programs: • Increase wages and bonuses to compete with limited-service hospitals • Note: Rebuilding programs is necessary since limited-service hospitals do not serve all patients (e.g. no emergency access, avoid low-income)

3. Full-service hospitals had to reallocate resources –investing more to rebuild affected services, while cutting back elsewhere. EXAMPLE Wichita Case Study Wesley Medical Center’s Actions Following the Opening of Galichia Heart Hospital and the Kansas Spine Hospital Competing with Limited-service Hospitals to Maintain Critical Programs Cutting Back on Other Subisdized Services • Increased cath lab staff salaries an average of $2 per hour (cost $2.5 million a year) and paid retention bonuses of $7,500 each • Laid off 120 full-time equivalent (FTE) employees in 2001 and another 54 FTEs in 2003 • Sold Occupational Medicine Clinic • Closed Electron Microscopy Research Center • Closed pharmacy research program Source: Wesley administration.

4. BryanLGH saw its bottom line decline by $10 million per year, raising concerns about support for other subsidized programs. EXAMPLE Lincoln, NE • BryanLGH operates one of the few remaining mental health inpatient programs (66 beds) at former Lincoln General site. • Mental health program requires a subsidy from other BryanLGH service lines, especially cardiac services. • With fewer dollars available, BryanLGH’s ability to continue to fund mental health at present service levels is questionable. “The NHH doesn’t provide anything we don’t already have in the community … fragmentation spreads out the business, erodes margins and puts quality at risk …” Physicians practicing at BryanLGH

5. From 2000 to 2004, the surgical hospital’s net income grew by $16 million…and the full-service hospital’s net income fell by $17 million. EXAMPLE Black Hills Case Study Net Income, Rapid City Regional Hospital vs. Black Hills Surgery Center, 1998-2004 Bond Rating Downgraded Net Income (millions) (Estimated) * Sources: IPO (2004) and RCRH (2004). RCRH had one time write-off of $6 million dollars in 2002. RCRH has a 7/1-6/30 fiscal year; BHSC uses a calendar fiscal year. BHSC’s 2004 net income is an estimate based on data contained its investor owners’ 2nd quarter report.

6. In Spearfish, financial performance of the community hospital also declined markedly. EXAMPLE Black Hills Case Study Lookout Memorial Hospital Financial Margins 1997-2004 ASC purchased from founder and converted to specialty hospital *A special provision of the Medicare Modernization Act of 2003 allowed LMH to reclassify for purposes of the wage index significantly improving Medicare reimbursement Source: Lookout Memorial Hospital

7. The loss of revenue has left the full-service hospitals with difficult choices. EXAMPLE Black Hills Case Study • Both full-service hospitals have begun to incur losses from patient services and must rely on philanthropy and investment income to cover costs. • Lookout Memorial had to eliminate home health and hospice care for its Wyoming residents • Although the effects have not fully played out, the choices open to the full-service hospital system include: • Reductions in subsidized and/or poorly reimbursed community services (e.g., wellness) • Reductions in services in outlying areas (e.g., support for critical access hospitals, reduction in hospice and home health care) • Staff lay-offs • Reductions in non-paying or low-margin services • Curtailments in plans for expanding services that would require subsidies (e.g., endocrinology/diabetes) • More dependence on philanthropy • Price increases

8. Reductions in emergency call coverage by physician-owners of limited-service hospitals helped precipitate a statewide crisis in trauma coverage. EXAMPLE Oklahoma City Case Study • Before the crisis, several Oklahoma City hospitals provided Level II trauma coverage and OUMC provided the Level I trauma coverage for the state. • When the neurosurgeons and other critical specialists opted out of call coverage, the Level II trauma hospitals could no longer meet state standards for specialty coverage.They began to downgrade to Level III status. • This placed unsustainable burdens on OUMC, which threatened to drop its Level I coverageunless others reinstated Level II coverage. • In the face of public pressure, the county medical society, the state hospital association and others brokered a compromise … • Neurosurgeons and other critical sub-specialists who had dropped off call agreed to provide coverage for one Oklahoma City hospital each night to allow for a rotating Level II trauma service. • Meanwhile, OUMC and the university physicians would continue to provide Level I coverage. • Thus far, the voluntary compromise has held up. Most physicians in the critical sub-specialties are participating.

9. Competition for staff increased labor costs – higher salaries, bonuses and turnover costs. EXAMPLE Oklahoma City Case Study Staff Turnover and Inducements to Avoid Turnover at OU Medical Center Source: OU Medical Center administration.

10. Cost-cutting measures eliminated positions and some programs in under-reimbursed services St. Anthony’s Response to Financial Losses Associated with Limited-service Hospitals • Closed outpatient clinics around the city • Reduced the medical education program • Reduced the eye surgery program • Closed the child behavioral day treatment program EXAMPLE Oklahoma City Case Study Source: St. Anthony’s administration.

11. Full text of the case studies can be found at:http://www.hospitalconnect.com/aha/press_room-info/specialstudies.html For further information, please contact the study authors: Keith Moore or Dean Coddington McManis Consulting 6021 S. Syracuse Way, Suite 207 Greenwood Village, CO 80111 720.529.2110 kmoore@mcmanisconsulting.com dcoddington@mcmanisconsulting.com Or the sponsors: American Hospital Association Attn: Caroline Steinberg Liberty Place, Suite 700 325 Seventh Street NW Washington, DC 20004 202.626.2329 csteinberg@aha.org Colorado Health and Hospital Association Attn: Larry Wall 7335 E. Orchard, Suite 100 Greenwood Village, CO 80111 720.489.1630 larry.wall@chha.org Kansas Hospital Association Attn: Tom Bell 215 S. 8th Avenue PO Box 2308 Topeka, KS 66601 785.233.7436 tbell@kha-net.org South Dakota Association of Healthcare Organizations Attn: Dave Hewett 3708 Brooks Place Sioux Falls, SD 57106 605.361.2281 hewett@sdaho.org Nebraska Hospital Association Attn: Laura Redoutey 1640 L Street, Suite D Lincoln, NE 68508 402.458.4900 lredoutey@nhanet.org