Return to Virginia Business - May 2003

Health care: When hospitals close
Closures are rare and big hospital chains often mean they reopen quickly

by Marjolijn Bijlefeld
for Virginia Business
May 2003

On a snowy Friday afternoon last December, police tape was stretched across the entrance of the parking lot at the Dickenson County Medical Center in Clintwood. Printed signs were slapped on entryways announcing that the hospital had closed. Emergency patients, the signs instructed, had to drive an extra 45 minutes over twisting mountain roads to find care.

For Dickenson County residents, the closing had an unsettling sense of deja vu. For the second time in its 16-year history, the hospital’s parent firm was heading into bankruptcy. In mid-November, the FBI raided the Ohio offices of National Century Financial Enterprises as investors charged that the leadership had misappropriated more than $3 billion. A month later, the 50-bed hospital was shuttered and 200 employees, with an annual payroll of $5.5 million, were out of jobs.

While rare, sudden hospital closures can have devastating impacts. If patients are seriously ill or hurt, they can lose critical time traveling to alternative hospitals. Emergency crews spend more time on the road and less in the community. Often hospitals are among a region’s largest employers, so a closure ripples through the local economy.

Ironically, the reasons behind closures may have little to do specifically with a Virginia-based facility and a lot more to do with corporate woes far out of state. That was the case in Dickenson County and could be in other parts of the Old Dominion. Indeed, Virginia’s hospitals are increasingly becoming parts of big chains. Overall, a handful of large and smaller hospital chains own more than half of the more than 80 hospitals operating in the state. Nashville-based HCA has 14, including CJW Medical Center near Richmond. Inova Health System owns five hospitals in Northern Virginia. Norfolk-based Sentara Healthcare has grown to six hospitals with last October’s merger of Williamsburg Community Hospital, in which it formerly held a 40 percent share.

While being part of a chain can pose risks, it also can present opportunities. Consider Sentara Hampton General Hospital, the only member of the Virginia Hospital and Healthcare Association that closed last year. After closing the unit, Sentara soon opened a brand new facility nearby — Sentara CarePlex Hospital and equipped it with technological advances such as a “smart” emergency room that would have been difficult to install in a retrofitting of the older hospital.

Virginia is one of many states with a special legal set-up that actually makes its hospitals attractive take-over targets. When companies come in and acquire financially troubled hospitals — one way for hospital chains to grow — they don’t have to worry about competitors building a facility nearby because of the state’s Certificate of Public Need (COPN) law. It requires approval from the state health commissioner before construction can begin on a new hospital or a major unit can be added to an existing hospital. The law is designed to avoid a glut of hospital beds and services. So a deep-pocketed hospital chain with the means to modernize an existing facility can get into a new market or expand in an existing one without worrying too much that their investment will be jeopardized by nearby competitors.

Curiously, a number of takeovers in the Old Dominion have been made by chains located in and around Nashville, Tenn., which has become to hospital chains what New York is to finance. Hospital giant HCA bought Northern Virginia Community Hospital last June and Henrico Doctors’ Hospital-Parham the year before. Another Tennessee company is Community Health Systems, which plans to buy Southside Regional Medical Center in Petersburg and most likely will replace it with a new facility. It already owns three other Virginia hospitals: Southampton Memorial Hospital in Franklin, Greensville Memorial Hospital in Emporia and Russell County Medical Center in Lebanon. In Community Health’s case, the chain was able to put together financial packages to rescue facilities that previous owners didn’t have the clout to arrange. “In each case, the hospital has been positive in terms of income, but didn’t have the ability to go out in the market through bonds to build a replacement,” says David Miller, a Community Health Systems senior vice president.

But, as is typical with hospital chains, Community Health has fixed criteria that must be met before it will go ahead with a buy. Miller estimates there are about 400 hospitals in the country that meet its criteria. Target hospitals must have no competitors within about 30 miles, net revenues in the range of $20 million to $100 million and be located in a pro-business state that has a COPN law. “That gives us some protection from other companies coming in and cherry-picking services,” he says. Proximity to major highways is a bonus because the hospital could become a regional health center. In Petersburg, for example, the company plans to build the replacement facility closer to Interstate 95.

Other chains have other criteria. “Anyone looking to acquire or merge with a facility would be looking to see that the mix of patients can sustain the facility,” says Vicky Gray, vice president for system development for Sentara Healthcare. With each potential merger or acquisition, the process starts all over again. “When you’ve seen one, you’ve seen [only] one,” she says.

Whether the hospital chain is not-for-profit, as many in Virginia are, or a religious entity or a for-profit organization, none can afford to merge with a hospital that can’t sustain itself. Even with a mission of providing health care to the community, not-for-profit Sentara, which provides $81 million in indigent care each year, still operates with a three percent bottom line. Its high volume, specialized services and insured patient demographics offset the costs of indigent care.

In rural areas, however, demographics can make it tough for hospitals to survive financially. According to the National Rural Health Association (NRHA), rural residents are less likely to have employer-provided health care coverage. More government payers typically mean lower reimbursements. Rural residents tend to be older, have more chronic illnesses or have riskier lifestyles than their urban counterparts. They are twice as likely as urban residents to die in motor vehicle accidents or from other unintentional injuries. The risk of death by gunshot is higher; the rate of DUI arrests is greater. “In rural communities the mix of patients is going to be elderly — which means they need more health care and use more resources,” says Tim Baylor, senior vice president of marketing and communications at Tennessee-based Wellmont Health Systems. “It’s very difficult under government reimbursement to cover expenses, much less invest in capital improvements to maintain the facility.” Baylor’s firm operates or has management contracts with hospitals in Big Stone Gap and Buchanan County.

One example of such difficulty is the tiny 25-bed R.J. Reynolds Patrick County Memorial Hospital in Stuart. In late March its owners filed for bankruptcy and asked a judge to allow a sale at auction. Charlie Trefzger, a potential buyer from Hickory, N.C., wants to buy the hospital for $2 million and invest $940,000 for debt payments, working capital and a new sprinkler system. He’s promised to keep the hospital open at least five years. The plan is awaiting approval by the U.S. Bankruptcy Court for the Western District of Virginia.

Perhaps Dickenson County will find a white knight as well. The county’s Industrial Development Authority is taking nothing for granted and has put in its own bid with the federal bankruptcy court in Ohio to buy the hospital. If successful, the authority will find a local team to operate it. County Administrator Keith Viers says he knows that the bankruptcy court judge’s obligation is to the bondholders. If the authority doesn’t buy it, Viers expects the owners to be another health care group intent on reopening the hospital.

Until the judge rules, however, people in Dickenson County are living a little more fearfully. Charlotte Mullins, director of the Industrial Development Authority, recently addressed a group of teachers and retired teachers. “I heard one woman saying, ‘I can’t climb up on a ladder because I can’t fall and get hurt.’ Before, we did our repairs around the house without thinking about it, but now we worry about getting sick or getting hurt. You don’t know how much of a security blanket a local hospital can be until it’s gone.”

Return to Virginia Business - May 2003