Valley Health Expecting to Deliver Hospitals

By Heerwagen, Peter

Valley Health is going into the hospital building business.

The Winchester health-care organization recently purchased land in Warren County for a new hospital, and its West Virginia subsidiary, East Mountain Health Advantage, has purchased land near Romney for a new hospital. A proposed merger announced last month with Page Memorial Hospital in Luray, Va., 45 miles from Winchester, includes a new hospital.

And Valley Health is in the hunt to purchase War Memorial Hospital in Berkeley Springs, whose owner, the Morgan County Commission, is looking to build a new facility. It already manages the hospital, has loaned the county $1.2 million for a land purchase and has agreed to guarantee any loans taken out for the build.

Except for Warren Memorial, the other three hospitals are designated as “critical care” facilities, with 25 or fewer beds, located in rural areas. As such, they are entitled to higher Medicare and Medicaid reimbursement than other hospitals.

But many smaller and older non-profit hospitals, although reporting excess revenue over expenses, need to replace outdated and inefficient facilities that are not geared to today’s medical technologies. Because they cannot afford to service the added debt incurred to build a new facility, they join hospital systems with stronger cash flows and balance sheets.

Enter the financial resources of Valley Health. Led by its large tertiary care hospital, Winchester Medical Center, it has consistently generated large excesses of revenues over expenses, including $63 million in calendar year 2007. Adding in depreciation of $34 million, the healthcare system threw off $97 million of cash flow last year.

Although Valley Health carried $218 million in long-term debt on its balance sheet at December 31, 2007, Valley Health and its subsidiaries had cash and investments of $160 million on that date. During last calendar year it invested $85 million in plant and equipment.

Mike Halseth, president and CEO of Valley Health, estimated the costs to build each of the three critical care hospitals would fall in the $25 million to $28 million range. “We would finance them with long-term debt of our own or one of our subsidiaries.

“I can’t say for sure if it [the mergers] will all pan out, but it potentially could make sense for us because Winchester Medical Center is a referral hospital that supports rural hospitals, and they will partner with us over time. It is very much part of our strategic plan to be that regional center.”

Valley Health’s Warren Memorial Hospital recently paid $2.6 million for 150 acres in southeastern Warren County, between John Marshall Highway and Happy Creek Road, located west of Front Royal. The state’s planned upgrade of the low-water Morgan Ford Bridge over the Shenandoah River would improve access to a new hospital for people living in the northern part of the county.

No plans have been developed for a new facility that would replace the 67-bed hospital on Shenandoah Avenue, nor has a price tag been estimated. “We wanted to purchase the land while it was available, but no site planning is contemplated at this point,” said Tom Urtz, director of marketing and public relations at Valley Health. “They need a more modernized facility.”

Halseth said a new build is about a decade away. “We have no short term plans. The [37,000-square-foot] outpatient facility on Commerce Street has taken the pressure off the main campus.

Last month Valley Health purchased 50 acres for a new Hampshire Memorial Hospital, replacing the current critical access, 25-bed facility owned by Hampshire County. On January 1, the health-care system purchased the certificate of need and certain operational assets of the hospital from a private party for about $6 million.

“The property is located behind the Hampshire Wellness and Fitness Center,” said Urtz, who estimated the construction cost at $30 million. The wellness facility is owned by the county, but managed by Valley Health.

“A certificate of need will be submitted to the West Virginia Health Care Authority in July, and if approval is received by the fall, we’ll -break ground before the end of the year,” said Urtz. “The new 65,000-square-foot hospital will have 14 critical-care, beds and 31 long-term care beds.”

With the signing of a letter of intent on July 10, Valley Health has a tentative agreement to merge the nonprofit Page Memorial Hospital into its health-care system. As with its mergers of Warren Memorial and Shenandoah Memorial hospitals, no money would change hands.

“Valley Health has a very good reputation for clinical quality and a positive approach to patient care,” said Travis Clark, president and CEO of Page Memorial.

Two years ago, Page Memorial conducted a strategic planning study, and concluded that it needed a new facility, but could not afford to build it. The $ 17 million revenue hospital had excess revenues over expenses of $330,000 in 2007, and with depreciation added, had a cash flow of $ 1.1 million.

“We determined that as an independent rural hospital, it would be difficult to get $25 million needed to build a new one,” said Clark. “After Valley Health does its due diligence, we will do a more formal plan. The actual cost of the hospital is way down the road.

“We’ve been able to do a fairly good job of buying new equipment for the hospital, spending about $1 million a year on it. But when you add in another $1 million [debt to pay for new] for bricks and mortar, that’s more difficult.

“Of the seven critical care hospitals in Virginia, only two are not part of larger organizations, ourselves and Bath County in hot Springs, and they have a large endowment.”

Clark said the hospital sent out six or seven requests for proposals “to regional hospitals and health-care organizations,” but for privacy purposes, would not reveal the names.

Halseth said two of them were Rockingham Memorial Hospital in Harrisonburg and the University of Virginia Health System in Charlottesville. They and Winchester Medical Center each get one- third of the Page County patients going to referral hospitals, he said.

Rockingham, although closer to Luray than Winchester, does not own other hospitals and is in the midst of building its own new facility, at a total cost of $300 million, to replace one built in 1912. And UVA is in the process of taking over Culpeper Regional Hospital to the east of Page County.

“We border Rockingham County, and folks here have doctors over there, but quite a few also go to Winchester,” said Clark. “Valley Health’s Warren Memorial and Shenandoah Memorial hospitals are fairly close, so they go to them for certain services.” With 2007 revenues of $85 and $68 million, respectively, for Warren and Shenandoah, they do a considerably larger business than Page Memorial.

But Todd Way, vice president of corporate services at Valley Health, said the goal is to beef up medical services at Page Memorial. “Our main strategy is to develop more services there, because a lot of patients are leaving the county.”

Using borrowed funds to build a new hospital might put Valley Health in the same loss position as Page Memorial, even if its interest costs were lower. But Halseth said, “We think we can operate it better than they can. We do back-office work for all our hospitals, including human resources and purchasing systems. There are economies of scale; we can do it for much less expense then they can.”

As for getting more referrals to Winchester Medical Center from Page County patients, Halseth said, “We have to earn it, and we expect to earn it.”

After exploring the idea of financing a new hospital itself, the Morgan County Commission has put War Memorial Hospital in Berkeley Springs up for sale. Likely buyers would be Valley Health, which has managed the hospital for a number of years, and West Virginia United Health System, which through its WVU Hospitals, owns both City Hospital in Martinsburg and Jefferson Memorial Hospital in Ranson.

“They [Morgan County Commission] have made a decision to sell it because they don’t know how to run it,’ said Halseth. “I expect the sale will be similar to that of Hampshire Memorial.”

Todd Way is on the War Memorial Board. ? don’t know who will be competing, but they are going to publish an RFP in newspapers in D.C., Pittsburgh and Richmond. We intend to participate.”

According to Halseth, that would be a different scenario from the way the merger of City Hospital and Jefferson Memorial Hospital into WVU Hospitals was handled. “That was a very closed deal, and we never had the opportunity to openly participate,” he said.

Copyright News for Business, Inc. Aug 2008

(c) 2008 Quad – State Business Journal. Provided by ProQuest LLC. All rights Reserved.