Planned merger of Southwest Washington Medical Center with chain raises questions

If a proposal to merge Vancouver’s Southwest Washington Medical Center with a sprawling Bellevue-based hospital chain goes through, one thing is clear: Southwest will cease to be an independent hospital with ties to only one community.

But there are more questions than answers about the planned merger with PeaceHealth.

Why did Southwest choose to partner with PeaceHealth, when other, closer-to-home hospital chains would have loved the opportunity? How much control is Clark County giving up? Will donors still be generous with the hospital when it’s headquartered elsewhere?

No one is saying such a merger, or “affiliation,” as both health care nonprofits have called it, will negatively affect the medical care people receive.

Backers of a marriage between Southwest and the larger PeaceHealth say it will bring benefits: boosting Southwest’s ability to raise capital for construction projects, increasing hospital services and adding jobs. And experts say a consolidation of this kind was only a matter of time as economic pressures and federal health care reform push hospitals to abandon their independent status in search of shared costs.

Others are concerned that combining the two hospitals may lessen local influence over how dollars are spent and who is hired — or fired — at Southwest, which employs some 3,400 full-time and part-time workers. Likewise, they question whether another large medical system will actually lead to cost savings.

Merger talks between the two nonprofit medical systems continue, with plans to wrap up the deal by the end of this year. Southwest’s leaders were expected to convene for a board retreat on Friday and Saturday. Ken Cole, spokesman for Southwest, said the board wasn’t expected to “vote on that issue of affiliation formally at the retreat. That’s going to happen sometime in November.”

Meanwhile, many observers and hospital constituents are waiting to see how it all will unfold.

“We’re primarily concerned with maintaining the quality of care our community gets,” said Doug Myers, a Vancouver ear, nose and throat doctor who is a past president and current board member of the Clark County Medical Society. “We don’t see (the merger) as something that’s going to dramatically change that.”

Nevertheless, the transition won’t be an easy one. “For a long time,” Myers said, “it’s been our own hospital.”

‘Time will tell’

The two nonprofit medical systems launched negotiations in March. If approved as expected, the merger would create a nonprofit health company with roughly 15,000 employees and nearly $2 billion in revenues. PeaceHealth would become the parent of Southwest Washington Health System, which runs Southwest Washington Medical Center. How much local control Southwest would retain has been part of the discussions about a merger.

In fact, it was an issue when Southwest talked to Seattle-based Providence Health & Services, which has several Portland-area hospitals, about a possible merger. Local control was also an issue when Southwest considered merging with Portland-based Legacy Health System, which runs a Salmon Creek hospital.

Marilyn Darr, president of the medical staff at Southwest, said the hospital’s choice of PeaceHealth was based, in part, on the belief that it would retain more local control under that organization than with either Providence or Legacy. “PeaceHealth was their best bet in terms of having local control,” she said.

Nevertheless, the choice of PeaceHealth wasn’t roundly expected. David Bennett, CEO of Rebound, a regional orthopedic and neurosurgery clinic that has an office at Southwest’s campus, said “many independent physicians” were surprised that Southwest didn’t choose Providence. Providence is a “well-developed health system,” with a strong set of physicians, multiple hospital sites and a health plan, Bennett said. Plus, it’s a close-by neighbor in the Portland-Vancouver region.

“Time will tell what will be best,” Bennett said.

Gary Walker, a spokesman for Providence, said the nonprofit “was looking forward to the possibility of working with Southwest” and that the two nonprofits share a common history. Providence also has been making inroads into Clark County, including opening its first Vancouver clinic in May 2009 and also buying land in Vancouver for future development.

However, Walker, citing a confidentiality agreement, declined to comment on what was discussed or why Providence wasn’t chosen as the merger partner.

John White, who completed 12 years of service on Southwest’s board in September, said the hospital decided to pursue PeaceHealth because “we wanted to be talking to a partner that would retain local authority with a local board.”

A matter of authority

However, some industry analysts are doubtful about how much power Southwest will retain over purse strings and hiring decisions. James Burgdorfer is a partner with the Chicago-based investment firm Juniper Advisory and has 20 years of experience in merger work with hospitals. He said how much local control you keep or give away when you join a parent organization depends on whether the marriage is an “affiliation” — essentially an agreement to work together on projects where local control is largely unaffected — or a “merger,” in which case the agency playing the role of subsidiary ends up losing most, if not all, control over its future.

“If you think that the big system is going to want to control you, it’s true,” Burgdorfer said, but that doesn’t make it necessarily a bad thing. “They have to control you for there to be business logic here.”

Peter Adler, senior vice president and chief strategy officer for PeaceHealth, said he doesn’t think there’s a set definition of terms that anyone should be worried about. While the two hospitals have described the potential relationship as an affiliation, Adler said, “there’s nothing probably inaccurate about the word ‘merger’ either.” Adler declined to provide specifics about how, exactly, local control would work and be maintained at Southwest. He said it would be inappropriate to go into those details when the boards of the two nonprofits have yet to approve the deal.

What is important is what PeaceHealth — which operates seven hospitals in Oregon, Washington and Alaska — has done in the communities it serves, Adler said. And that’s been to allow local authority over decisions. PeaceHealth “has a common set of (human resources) policies and procedures like any organization and those would be common,” Adler said, “but the day-to-day management and month-to-month oversight” would stay “in the community.” He said spending decisions in all of PeaceHealth’s regions are up to local boards, “but within parameters. It’s a balance that has worked really well in all of our communities.”

Whether you call it a merger or an affiliation, PeaceHealth isn’t paying anything for Southwest. Adler explained the deal in an Aug. 23 letter to the Washington Department of Health: “The proposed affiliation does not constitute a purchase, lease or sale of an existing hospital because PeaceHealth will not pay any funds to any party in exchange for becoming the sole corporate member of (Southwest). Additionally, the proposed affiliation will not result in the establishment of a new hospital.”

Care, profitability and consolidation

Both Adler and local backers of Southwest said the merger would not change where money raised to support the hospital goes.

Jean Rahn, executive director of the Southwest Foundation, which works with donors to raise money for patients, hospital programs and departments, said that “we are still the community’s hospital” and that donors need to know their contributions to Southwest will continue to “stay here and benefit this hospital.”

In fact, Rahn said, the merger would have a positive influence on Southwest’s philanthropic efforts. PeaceHealth’s expertise in building relationships with donors and developing attractive, strategic ways for them to contribute would only boost Southwest’s capacity to grow and serve people, she said. “It’s a real plus for us.”

Local control wasn’t the only factor influencing Southwest’s decision to pursue joining forces with PeaceHealth. Another was Southwest’s need to find the right partner that would help shore up its finances in the face of economic circumstances that have left more people unable to pay their medical bills and have increased the hospital’s write-offs for charity care and bad debt, said Cole, the spokesman for Southwest.

Like any business, hospitals, even nonprofit ones, must maintain a certain financial margin to stay healthy, said Darr, the president of Southwest’s medical staff. That margin is a consideration for Southwest as it faces increased competition in the marketplace and rising costs. “Hospitals work on how much they can borrow,” Darr said. “It’s all about how much profitability you have.”

Another reason behind the choice of PeaceHealth had nothing to do with profitability: Southwest saw the agency as a kindred spirit, in part, because of its focus on providing health care to people regardless of their ability to pay.

David Nierenberg, a director emeritus of Southwest, is a major supporter of the hospital. He chipped in $15 million to match the first pledge of $15 million by E.W. Firstenburg — the Vancouver banker and philanthropist who died in August — to build the hospital’s Firstenburg Patient Tower. Nierenberg, an investment manager from Camas, said the two nonprofit hospitals share similar values. He described PeaceHealth’s leaders as a “remarkable group of people” who “walk the walk, and talk the talk” of translating their Catholic faith into excellent health care for all people, regardless of their incomes.

White, the former Southwest board member, said the merger also made sense because “if you look nationally, the number of independent hospitals in this country is dropping precipitously and the reason is that it becomes harder and harder every day to compete against larger systems that have leverage in buying and leverage in hiring.”

Burgdorfer, the Chicago expert in hospital mergers, said such combinations occurred at an annual rate of about 125 to 150 in the 1990s. That rate slowed to roughly 25 to 50 per year in the 2000s. Now, with federal health care reform calling for coordinated care and reduced costs, and with an economy that isn’t conducive to going it alone, Burgdorfer said, “there’s a tremendous view all around the country that the number of combinations is going to dramatically increase.”

Backers of the deal with PeaceHealth said it would bring financial benefits, including, for example, the ability to invest in a single efficient electronic health records system for both hospital groups and to spread the cost. Cole said Southwest also hopes to improve patients’ access to care by joining PeaceHealth. For example, there are Cowlitz County residents who must drive to Oregon for certain types of medical care because those services aren’t available in Longview, where PeaceHealth runs St. John Medical Center. With Southwest in PeaceHealth’s network, “we hope to earn those referrals, so patients can stay closer to home for their treatments than drive into Oregon,” Cole said.

Questions still loom

Not everyone is convinced by merger proponents’ promises.

Lyall Crary, a retired Clark County urologist, said that while he understands the confidentiality surrounding merger negotiations he worries whether the public understands what’s going on. “I don’t think people have enough information as to what the pros and cons of this are,” he said. He has questions: Does PeaceHealth run its hospitals more efficiently than Southwest? What are the cost savings for Southwest?

“They should have a meeting where they really explain what they’re going to gain from this before they do it,” Crary said.

Meanwhile, the future of Southwest is on employees’ minds in light of the proposed merger.

Elyssa Morris, a nurse at Southwest who works primarily in orthopedics, tends to patients in 12-hour shifts and sometimes acts as a “charge nurse,” assigning work to other nurses. She said she isn’t worried about the proposed merger, “as long as the care stays the same.” Having worked at Southwest for nine years, Morris said, she believes her position is safe. As she puts it, she doesn’t think someone from PeaceHealth could “bump me too easily.”

Cole, the Southwest spokesman, said the hospital has consistently told employees that joining PeaceHealth won’t affect their job status “anytime soon.”

“The reality is we’re much more susceptible to what the economy does and outpatient volumes and people’s ability to pay for health care,” he said.

In his Aug. 23 letter to the Washington Department of Health, Adler, in describing what would happen to Southwest’s staff if the hospital joins PeaceHealth, said “medical and other staff will remain the same but for turnover in the normal course of business.”

One glimpse of how PeaceHealth would change the job market in Clark County is its plans to establish a central office in Vancouver that could pull several hundred jobs out of its locations in Oregon and other places. The move, which would be two years off, will take place only if the merger is completed. Intended to boost efficiencies, the planned shared services center would house back-office operations, such as information technology and accounting, and it would support all of PeaceHealth’s systemwide administrative functions.

When asked whether PeaceHealth had any plans to move its headquarters to Vancouver, Adler said “that has not been the focus of our conversations.”

What is clear is that PeaceHealth is serious about gaining a foothold in Clark County. Myers, the Vancouver ear, nose and throat doctor, said what it will mean for Southwest’s relationship to the community is unclear, partly because it’s impossible to predict the long-term implications of a merger.

“PeaceHealth tends to give more autonomy to local hospitals,” Myers said. “That’s the theory. Whether or not that’s going to happen, we’ll just have to wait and see.”