Springfield hospital links with big chain.

Byline: JOE HARWOOD and MATT COOPER The Register-Guard

SPRINGFIELD - If you're going to marry for money, you might as well choose a billionaire.

So it will be for McKenzie-Willamette Hospital, which apparently has found a wealthy spouse in Triad Hospitals Inc., the third-largest for-profit hospital chain in the United States.

Faced with declining revenue and patient counts, along with pressure from a larger competitor, cash-strapped McKenzie-Willamette during the past several months has been quietly searching for a financial partner with deep pockets to keep the independent, nonprofit hospital afloat.

McKenzie-Willamette is expected to announce this morning that the search is over and it has signed a deal with Texas-based Triad.

Details of the arrangement - for example, whether Triad would buy McKenzie-Willamette or form some kind of partnership - were not clear Wednesday.

It also was unclear what Triad would do with McKenzie-Willamette. Many local observers were speculating that Triad would build a new hospital for McKenzie-Willamette in west Eugene, to serve a city that would be left without a major hospital if PeaceHealth is able to win approvals to build a new hospital in Springfield's Gateway area.

McKenzie-Willamette spokeswoman Rosie Pryor declined to comment, and Triad officials did not return phone calls to The Register-Guard.

But several local officials familiar with the situation, Springfield Mayor Sid Leiken among them, said Triad and McKenzie-Willamette had struck a deal.

"Triad is very, very excited about the prospects of being involved in the community, and the McKenzie-Willamette board and leadership is very excited about the agreement that has been made," Leiken said Wednesday morning.

Leiken later partially recanted, saying he was unsure whether the partner was Triad.

McKenzie-Willamette has scheduled a news conference for 9:30 a.m. today for "an important announcement."

Long before word leaked out about the Triad deal, officials with the Springfield hospital said they would most likely have to move from the current location off Mohawk Boulevard in midtown in order to stay competitive.

That's because PeaceHealth, based in Bellevue, Wash., is seeking city approval to build the $350 million RiverBend regional medical facility in Springfield's Gateway area, a scant 2 1/2 miles away.

Critics of PeaceHealth have seen the out-of-state health organization as bullying the smaller Springfield hospital, but Triad's entrance would completely turn the tables: Triad has about four times the annual revenue of PeaceHealth.

In Triad, McKenzie-Willamette would get not only a partner with plenty of cash but an experienced health care management company with the clout and resources to compete against PeaceHealth's Sacred Heart Medical Center in downtown Eugene.

Based in Plano, Texas, Triad operates 48 hospitals and 14 ambulatory surgery centers across the country. Through a subsidiary, it also provides hospital management and other services to more than 200 independent community hospitals and health systems in 43 states.

For the first nine months of 2002, fast-growing but debt-laden Triad posted sales of $2.6 billion, up 44 percent from the same period a year earlier. Triad's total revenue will exceed $3.3 billion for 2002.

McKenzie-Willamette appears to fit with Triad's business model. More than 75 percent of Triad-owned hospitals are in small cities with populations of less than 150,000, and those facilities are usually either the only hospital in town, or one of two or three hospitals in the community.

Triad's only other facility in Oregon is the Willamette Valley Medical Center in McMinnville.

Ken Rutledge, president of the Oregon Association of Hospitals and Health Systems, said the merger should be positive for McKenzie-Willamette and the Eugene-Springfield area. The association represents the 61 hospitals in the state.

"Triad, because it is a large system, adds resources, capital and allows you to spread your fixed administrative costs over a broad corporate structure," Rutledge said, adding that he had no direct knowledge of the deal and was commenting in general terms.

The deal also could provide McKenzie-Willamette "with a lot of expertise that a small community hospital may not have," he said, "things like regulatory issues, computer systems and the acquisition of medical technology."

Rutledge said his experience with the Triad facility in McMinnville has been positive. "They are a solid community partner and there is a very positive working relationship with the physicians in McMinnville," he said.

Whether McKenzie-Willamette will stay in Springfield after Triad's arrival also is unclear.

"As of right now, as we speak, the intention is to continue to operate out of the location that is there now," Leiken said.

Triad's behavior over the past 12 months provides some clues.

The company last year started negotiations to acquire two hospitals in West Virginia and North Carolina. As part of the proposed transactions, Triad agreed to lease the existing hospital buildings while it constructed new "replacement" facilities at a combined cost of $103 million, according to company filings with the U.S. Securities and Exchange Commission.

Triad last year also started talks to become the majority partner of a nonprofit hospital in Palmer, Alaska. The company plans to build a new $75 million hospital in Palmer if it strikes an agreement with the nonprofit, according to SEC filings.

Triad is now building a replacement hospital in Bentonville, Ark., for $63 million; a new hospital in Mesquite, Nev., for $20 million; and a new hospital in Tucson, Ariz., for $85 million, according to SEC filings.

Triad's most recent filing with the SEC said the company was exploring opportunities with other nonprofit hospitals, but didn't provide specifics.

The company has plenty of cash to acquire existing hospitals and build new ones. The company four months ago received the green light from the SEC to raise $800 million by selling bonds and others securities.

In its third-quarter 2002 financial report, Triad said it had long-term debt of $1.6 billion. In part because of its huge debt payments, Triad has reported skimpy profits. In 2001, it earned a profit of just $2.8 million on sales of $2.6 billion.

If McKenzie-Willamette and Triad decided to exit Springfield because of the PeaceHealth project, where would they put a new hospital?

One rumor has McKenzie-Willamette building a new hospital at the Lane County Fairgrounds west of downtown Eugene.

With PeaceHealth seeking to move the bulk of its patient operations to Springfield from the Sacred Heart campus at Hilyard Street, the fairgrounds makes for a fairly central location for a Eugene hospital, real estate experts said.

Eugene City Manager Jim Carlson said he hasn't spoken with McKenzie-Willamette since last year, when officials identified the fairgrounds as one of a number of viable hospital sites in the city.

Local observers say the fairgrounds could be moved to the Bethel-Danebo area or perhaps to land south of Lane Community College owned by Eugene real estate firm Arlie & Co.

John Musumeci, who runs Arlie's land-trading operations, said putting a hospital at the fairgrounds and moving the fairgrounds to Arlie land was "complicated" and declined to say whether his company is involved.

"If (McKenzie-Willamette) wants to contact us for the purpose of helping them relocate, we would be very happy to work with them," Musumeci said Wednesday. "No one at Arlie has gone to McKenzie-Willamette to ask them about relocation."

The 1,100 acres Arlie owns to the south of LCC lies outside the urban growth boundary and is zoned for forest uses.

Musumeci wants to develop the land, but is precluded by land use rules from building more than a handful of homes there.

Moving the fairgrounds there would require changes to the Eugene-Springfield Metropolitan Area General Plan.

Eugene Mayor Jim Torrey said the pending Triad announcement is good news for Eugene because it preserves competition between McKenzie-Willamette and PeaceHealth.

McKenzie-Willamette a year ago sued PeaceHealth, alleging that PeaceHealth is wielding its dominant market power in Lane County to engage in predatory business tactics to drive the smaller hospital out of business.

McKenzie-Willamette alleged that PeaceHealth has negotiated contracts with insurers to steer patients to Sacred Heart and away from the smaller Springfield hospital. PeaceHealth denies that it is breaking any laws.

Torrey also suggested that Eugene - more than twice Springfield's population but facing the prospect of being without a primary hospital should PeaceHealth build in Springfield - may be the ultimate destination for McKenzie-Willamette.

"I've got to believe, if (Triad) is going to be a good competitor as opposed to just barely keeping McKenzie-Willamette afloat, I would bet before they're done they're going to be considering Eugene as a site," Torrey said.

Torrey said he doesn't support financial handouts or property condemnations to attract a hospital, but he said he would push to speed up the permitting process, work with hospitals on zoning and land use changes and streamline the litigation processes available to opponents.

Triad was spun off from hospital chain giant HCA in 1999 after a prolonged government health fraud investigation into HCA. Since 2000, HCA has paid more than $1 billion in civil and criminal fines and other compensation to the federal government for Medicare-related fraud and overbilling, according to SEC filings.

After its spinoff, Triad bought a string of hospitals in the Sunbelt states. In 2001, the company acquired Quorum Health Group Inc. for $2.4 billion in cash and stock as part of an expansion drive into the Southeast and Midwest.

Triad and Quorum, another HCA spinoff, are still struggling with issues related to fraud and overbilling at HCA.

TRIAD HOSPITALS

Business: One of the largest for-profit hospital chains in the country, with operations in 18 states

Hospitals: 48

Ambulatory surgery centers: 14

2001 financial results: Profit of $2.8 million on revenues

of $2.6 billion

Headquarters: Plano, Texas, a suburb of Dallas

McKENZIE-WILLAMETTE HOSPITAL:

Facility: 114-bed hospital at Mohawk Boulevard and G Street in Springfield

Financial results: Revenues in 2001 of $74 million; profit (excess of revenues over expenses) of

$1.9 million

Legal status:

Nonprofit

CEO: Roy Orr

PEACEHEALTH

Hospitals: Six, including Sacred Heart Medical Center in Eugene and hospitals in Longview, Wash., and Bellingham, Wash. Headquarters in Bellevue, Wash.

Financial results: In 12 months ended June 2002, revenue of $768 million; profit (excess of revenues over expenses) of $43.5 million

Legal status:

Nonprofit

CEO: John Hayward in Bellevue; head of Oregon division is Alan Yordy in Eugene.

- Company filings

CAPTION(S):

CHRIS PIETSCH / The Register-Guard Roy Orr is CEO of McKenzie-Willamette Hospital, which reportedly has signed a deal with a major medical chain.