Northwest Health Plans $72 Million in Improvements

$14 million will be used to revamp hospital computer system

Northwest Health System is planning $72 million in improvements over the next five years, including $14 million to revamp the computer systems at Northwest’s two hospitals — Northwest Medical Center in Springdale and Bates Medical Center in Bentonville.

At the same time, Northwest is awaiting the results of a study to determine how the system will pay for the improvements. The study should be completed within the next month and provide a short list of possible partners for the hospital system to consider. And selling the hospital hasn’t been ruled out.

The plan comes six months after the hospital board hired a new CEO to cut costs and make the system more profitable in the wake of competition.

“We’ve got a lot on the table,” says Bob Shaw, who took over in February as chairman of the board of Northwest Health System. “It’s an exciting kind of thing in a sense. I don’t really see a down side to it. We’ll come out in better shape. The community will benefit from this either way we go.”

Shaw says the improvements are necessary to vie for patients in the area’s competitive health care climate. In addition to competition, managed care and cuts in Medicare and Medicaid payments have made it more difficult for hospitals to make money, he says.

The merger of Northwest Medical Center and Bates Medical Center was finalized in 1996. Northwest Medical Center is the larger of the health system’s hospitals with 222 beds, compared to 63 beds at Bates.

Taking Stock

Last year, Russ Sword, who resigned in July as CEO for Northwest, told the Northwest Arkansas Business Journal that the system had an operating deficit of $1.1 million 10 months into fiscal 1996 (which ended June 30, 1997). At the time, rumors were circulating about an impending sale of the hospital.

Two months later, the hospital ended the fiscal year $2.3 million in the black, according to records provided to Arkansas Blue Cross and Blue Shield. (That amount is $1.2 million less than the previous fiscal year.)

Georgia McCurdy, a spokeswoman for the hospital system, says she didn’t know where the money came from to level out the books, but she believes it was from Medicaid or Medicare payments that came in at the end of the fiscal year.

“I’m 99 percent sure it wasn’t a donation,” she says. “That was from the books leveling out at the end of the year.”

Records show the hospital system received slightly more than $3 million in contributions from all sources during fiscal 1996. All but $500,000 of that came from Bernice Jones in her annual donation (see accompanying article on page 15).

After Sword’s resignation, the hospital board commissioned Quorum Health Resource Inc. of Nashville, which had been doing an audit of the system, to run the facility for the next five years.

After a short search for a new CEO, the hospital system’s board hired Greg Stock, 46, who had made dramatic changes during the seven years he ran Thibodaux Regional Hospital in southern Louisiana. He arrived in December to redirect Northwest and in the past four months trimmed the budget to make Northwest profitable, Shaw says.

“We probably made as much in the past four months as we lost in the previous six months,” says Shaw, who has been on the hospital’s board for the last two years. But the cuts came at a cost to some hospital employees who were laid off as a result.

Doug Lewis, CFO for Northwest, refused to release figures for fiscal 1997, so the deficit Stock inherited and the turnaround couldn’t be determined.

In fiscal ’96, Northwest had revenue of $132 million with a 1.77 percent return on revenue. The hospital had $110 million in assets and 1,390 full-time employees at the end of that fiscal year.

Stock wouldn’t talk about the numbers for fiscal ’97 either but admits that he’s known as a “turnaround CEO.”

After initially implementing layoffs and cost-cutting measures at Thibodaux Regional, the hospital’s staff doubled and revenue tripled during the seven years Stock was there.

Holly Houk, a spokeswoman or Thibodaux Regional, says Stock also doubled the number of doctors on staff to more than 100 and increased the hospital’s inpatient census by more than 45 percent and outpatient visits by 220 percent — “numbers that contrast sharply with national trends toward significantly declining patient census.”

“We went from a small community hospital to growing into a regional medical center,” says Houk.

Stock says the deficit at Northwest and, in particular, large losses in November, “precipitated taking costs out of the system and doing other things to turn the aircraft carrier around.”

Stock says he initially laid off 50 to 60 people in management positions at Northwest. Stock says he reduced the bureaucracy so decisions could be made faster and at a lower level “where the action is.” None of the layoffs affected nurses or direct patient-care employees, he says. The system had 1,750 full and part-time employees as of April 1 with an annual payroll of $36 million, says Shaw.

As a result of his cost-cutting efforts, Stock says, April “might have been one of the best months the hospital has ever had.”

Stock says he’s working to generate cash revenues, which were largely depleted when the hospital built two new high-rise buildings in Springdale.

Through education of staff, improvements in clinical technology, and patient satisfaction, Northwest will undergo a financial turnaround, says Stock.

“Our goal is to improve quality, to increase market share, to be financially viable,” he says. “We know we have to act in a more businesslike fashion to provide better patient care.”

Improvements cited

Spurred by the partnership of Fayetteville’s Washington Regional Medical Center and Rogers’ Mercy Medical System, Shaw says a “critical action group” of about a dozen people — including doctors, staff members and directors — met in 1996 to determine what Northwest would need to do to compete.

Sisters of Mercy, a St. Louis-based health care company that owns the Rogers hospital, and Washington Regional, introduced its health care plan, a preferred-provider plan, with partner Arkansas Blue Cross and Blue Shield. The plan, Arkansas Health Partners, is modeled after a similar one that Blue Cross began in 1996 in Hot Springs.

But Northwest Health System remains locked out of the Blue Cross network. Patients with insurance from Blue Cross face higher bills if they use out-of-network providers such as Northwest. So Northwest markets its own health-care plan, PremierCare.

The critical-action group listed a variety of improvements totaling $72 million that should be addressed within the next three years, says Shaw. The computer system overhaul, which, he says, will create a “seamless system” between the two hospitals, will take a bit longer — about five years.

“It’s the kind of thing the public won’t see,” says Shaw. “It’s infrastructure. … It’s one of the really important things that will be there for years to come.”

Besides a new, $1.7 million obstetrics-gynecology building at Bates and $400,000 in renovations to the existing hospital there, Shaw won’t reveal anything else that was specified by the group for improvements. That’s because some of those things are still in the works, he says, and bids are being taken on some projects. He won’t say who’s doing the computer work for the hospitals either: The deal was finalized in late May, but there was no ink on the contract at the time of this interview.

“It became obvious we were going to have to seek capital to get those done,” Shaw says of the list of improvements.

Shaw says the board postponed implementing the improvements a year ago because of the hospital system’s financial troubles.

“We are now beginning to see a lot more improvement in the financial area,” he says.

Partnership sought

The study, being conducted by the accounting firm of Deloitte and Touche, will outline the most practical ways for the hospital to generate capital.

“We’re really looking for capital from another health source,” says Shaw.

Possibilities include a partnership with another local hospital, with a national hospital group or with a group of doctors.

“At this point, what they’re doing is determining who would be an appropriate partner for us and whether there’s a need for that,” says Shaw.

The most drastic option would be selling the hospital outright.

“What kind of partnerships and offers may emerge, I don’t know,” Shaw says.

Other possibilities include selling off one of the system’s buildings, or other assets, and leasing it back from the new owner. That would generate a large amount of cash for the needed improvements, says Shaw. When assets of a non-profit hospital are sold, by law, the money must be returned to the community in the form of other medical services, he says. So if a for-profit organization purchased one of the hospital’s buildings, that building would continue to be used for medical purposes.

“The community will benefit from this either way we go,” says Shaw. “We have sort of crossed the threshold of where we’ve been in the past year and where we’re going.”