Northwest Health Upgraded to Stable

Quorum Bails Out Struggling System

Northwest Health System’s 14-member board of directors knew more than a month before its public announcement Aug. 8 that the community-owned, not-for-profit entity would have to be sold.

“We learned we had a strong need for capital, and we needed it quick,” says Bob Shaw, who has been the board’s chairman since February.

But a physician who was involved in the process says the necessity of a sale has loomed for much longer, and he blames competitive forces.

“It seemed that [a sale was coming] for over a year,” says Dr. John Kendrick, a practicing physician for the past 17 years. Kendrick is president of QualitiCare, a physicians’ group representing about 280 doctors who practice at Northwest’s hospitals in both Springdale and Bentonville.

Terms haven’t been disclosed for the sale to Quorum Health Group Inc., which won’t close until the parties receive a fairness opinion from an independent source and are satisfied with the contract. Using an industry multiple and the hospital’s annual revenue of about $87 million, the purchase price could fall somewhere between $160 million and $200 million.

The sale includes both Northwest Medical Center in Springdale, which is licensed for 222 beds, and Bates Medical Center in Bentonville, which has 63 beds. Proceeds from the sale would likely be deposited into a public foundation — under provision 501(3)c of the tax code — and be spent on community projects.

Kendrick acknowledges that, just a few months earlier, Northwest’s administrators had resisted overtures from for-profit entities.

“They definitely did resist,” Kendrick says. “What changed their minds is that health care became more and more complex and, I guess, more and more political.”

Kendrick says Quorum, a publicly held company based in the Nashville, Tenn., suburb of Brentwood, was the best and the unanimous choice of 16 physicians who participated in the final interviews of potential suitors.

He expects the sale ultimately will be good for physicians because it will ensure the hospital’s survival, something many doctors believe has been uncertain in recent months.

“It will help us quit worrying about the viability of our hospital,” Kendrick says.

When asked how imminent the threat of closure might be, Kendrick answers, “Closer than we would want to admit.”

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Tax benefits

The communities in which Northwest owns property are likely to benefit monetarily. Properties that for the most part have escaped tax assessment because they are owned by a not-for-profit entity — Northwest Health — will go back on the tax roles.

The two newest buildings at the Springdale hospital, the six-story Harvey Jones Tower and the seven-story Jones Clinic, were completed in 1995 at a cost of $32.1 million. If the buildings appraise for that amount, the property tax on them would generate $306,876 per year for Springdale and Washington County.

Although those are the newest and presumably most valuable of its properties, Northwest owns 46 parcels of land in Washington County, not including the Bates property in Bentonville. (See accompanying list of buildings owned by Northwest.)

Shaw, chairman of Northwest’s directors, says Quorum has agreed to implement $72 million in improvements that had been suggested by a “critical action group” of physicians, staff members and directors and endorsed by Northwest’s board. The improvements include $14 million to revamp the hospitals’ computer system, but officials won’t say what else is included pending finalization of the deal with Quorum.

Part of the tentative agreement is a commitment to support the hospital system’s own managed-care plan, PremierCare, Kendrick says.

PremierCare was launched a couple of years ago as Northwest’s attempt to capture a share of the patient pool.

Kendrick, who also serves as president of PremierCare, says it has been successful. About 30,000 people are covered by the plan in Northwest Arkansas, and that number is expected to grow as teachers and other state employees opt for the plan.

PremierCare will “absolutely” continue, he says. “That will continue to be our contracting vehicle.”

Kendrick laments the events that made the sale an economic necessity. It’s not what he expected as a young medical student.

“I thought if I practiced good medicine and my patients liked me, that was enough,” Kendrick says.

The evolution of the health care industry has forced Kendrick and other physicians to spend more time than they’d like on the business side of medicine.

“Who would have ever thought that a company with a $40 billion cash reserve would come to Northwest Arkansas and spend money irrationally?” he asks rhetorically. He is referring to Sisters of Mercy, the St. Louis-based health system that now owns St. Mary’s Hospital and at least a dozen clinics in Benton County.

Kendrick estimates the Mercy system has spent $90 million in the market. He notes grimly that it “has not improved health care any.”

But Mercy’s entry into the market, and its subsequent purchases, as well as its partnership with Washington Regional Medical Center, heated up the competition.

Northwest administrators already had recognized the need to become a regional health care provider, Kendrick says. “We got started through PremierCare and made a very good start.

“But it takes a lot of money to become a regional health care provider. The competition got hotter and hotter” as the Mercy system spent more and more money.

An already-bad situation worsened when Arkansas Blue Cross and Blue Shield excluded Northwest Health from its network of providers. Russ Sword, the hospital’s chief executive at the time, tried to rally public support in hopes that the pressure would force the company to include Northwest in its network.

He was unsuccessful.

Community hospital roots

Another physician who practices in the Northwest system points out that community hospitals came about because of necessity.

“There were no hospitals in the area,” says Dr. David Davis, a neurologist who treats patients at Northwest. Recognizing the need, community leaders led efforts to build a hospital.

But times have changed and so have expectations. Modern acute-care hospitals are expected to provide many more specialized services than facilities of past times.

“I think when you look at what’s happened, the board of Northwest was able to recover [with the proposed sale] probably more money than was put into [the hospital],” Davis says.

“The community now will be left with a hospital owned by a well-respected, well-run national enterprise.”

No dollar figure has been revealed publicly, but Davis says it’s “a large chunk of change.” Kendrick says it’s a “large commitment.”

Among the early supporters of a Springdale hospital were Harvey and Bernice Jones. Since her husband’s death, Mrs. Jones has continued as the hospital’s most generous benefactress, and, in fact, she previously agreed to give the hospital $2.5 million annually through the year 2002.

It’s unclear whether Mrs. Jones will continue to make those donations if the hospital is owned by a for-profit entity. Daniel Ferritor, a trustee for the Harvey and Bernice Jones Foundation, says those gifts are from Mrs. Jones’ personal accounts. She couldn’t be reached for comment.

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Quorum deal

As for the sale itself, Shaw says a flurry of faxes flew back and forth between Springdale and Nashville on the evening of Aug. 7, the night before the sale was announced.

In an interview in May, Shaw told the Northwest Arkansas Business Journal that the hospital system was looking for capital and that several options, including an outright sale, were being considered. But he downplayed that at the time, saying a partnership or selling one of the hospital’s buildings seemed more likely.

The board then was awaiting the results of a study by the accounting firm of Deloitte & Touche to determine the most practical ways for the hospital to generate capital.

Eventually, the board mailed about 30 letters soliciting proposals from potential partners. It received 11 proposals, nine of which were from for-profit companies. Of the 11, Shaw says, only two were possibly acceptable to raise the capital needed, and those were both from for-profit health care groups.

“The non-profit merger became a non-issue because we didn’t have anybody to look to,” Shaw says.

Quorum generally gets good marks from people who work in the industry for its performance with facilities it owns or manages. Founded in 1989, the company was a spinoff from Columbia/HCA Healthcare Corp. But where Columbia became a major owner of hospitals, Quorum’s intent was to be a hospital contract management business. It has largely stayed with that mission and now manages 238 hospitals that are licensed for a total of 27,700 beds.

More recently, however, Quorum announced its intentions to acquire or build more acute-care hospitals. It already owns 19 hospitals with licenses for a total of 4,222 beds. The company recently added another $150 million to its $850 million available credit for the specific purpose of future acquisitions and/or construction.