Triad agrees to build new hospital.

Byline: JOE HARWOOD The Register-Guard

SPRINGFIELD - Triad Hospitals Inc., the nation's third-largest for-profit hospital chain, will become the majority owner of McKenzie-Willamette Hospital under a preliminary partnership agreement signed Thursday.

Under the deal, Texas-based Triad will provide approximately $80 million in cash to develop and build a new 114-bed hospital for McKenzie-Willamette somewhere in the Eugene-Springfield area.

McKenzie-Willamette and Triad officials said they haven't chosen a site yet, but did say they were looking for about 35 acres to build a 180,000- to 220,000-square-foot hospital. The parcel would also be home to a 70,000- to 80,000-square-foot medical office building the partnership would build, they said.

Dan Moen, Triad's executive vice president, said building the new facility on McKenzie-Willamette's current campus on Mohawk Boulevard in Springfield was "doubtful." Triad might seek to convert that complex into an assisted living center or other similar venture, he said.

Moen said Triad hopes to finalize the partnership agreement, acquire land, secure land-use permits and build the new hospital in about two years.

Triad is betting that in the long run its big upfront cash investment in a new hospital will pay off in a steady stream of profits, Triad officials said. The Eugene-Springfield area has strong long-term growth prospects and is large enough to accommodate two financially successful hospitals, said Triad CEO Denny Shelton.

The proposed partnership is subject to review by the Oregon attorney general's office. The agency's anti-trust and charitable activities divisions will look in to the deal, said Jan Margosian, spokeswoman for the agency. McKenzie-Willamette is a non-profit organization.

Thursday's announcement caps a tumultuous period for McKenzie-Willamette and Lane County's health-care marketplace. Before Triad entered the picture, McKenzie-Willamette officials had said they would likely have to move from their midtown campus in order to stay in business because PeaceHealth is seeking city approval to build a $350 million regional medical facility nearby, in Springfield's Gateway area.

PeaceHealth, if it gets the OK for that project, would move the bulk of its operations to Springfield from the Hilyard Street campus in Eugene. The nonprofit health system has long maintained that moving into Springfield would not hurt McKenzie-Willamette.

Cash-strapped McKenzie-Willamette has spent months seeking a larger partner with the money and health-care expertise to put the community hospital on a more competitive footing with its much larger rival.

McKenzie-Willamette CEO Roy Orr said his hospital's weak financial position - it is losing money and its patient volumes are declining - meant it was unable to independently borrow money on the bond market. The bond market considers McKenzie-Willamette too shaky to lend money to, Shelton said.

Maureen Weathers, chairwoman of McKenzie-Willamette's board, which unanimously approved the preliminary agreement, said she was thrilled at the deal. "We do believe competition is the best way to serve the people of this area," she said.

Shelton said his company has a strong track record of successful partnerships with small, nonprofit hospitals such as McKenzie-Willamette. He pledged to work with hospital management and employees and the community to develop a competitive and financially viable medical facility.

"We are health care people first and business people second," Shelton said. "We have a very good understanding of how hospitals work."

While officials were guarded about where the new hospital might end up, they indicated it is important for the facility to have its own geographic catchment area, distinct from PeaceHealth's.

Triad has 48 hospitals and 14 ambulatory surgery centers across the country. Through a subsidiary, it manages 208 independent, nonprofit hospitals and health systems in 43 states.

Specific terms of the agreement probably won't be ironed out for several months, but a rough outline looks something like this:

McKenzie-Willamette and Triad would form a for-profit McKenzie Willamette Hospital entity into which each of them would contribute assets. Triad would provide up to $80 million; McKenzie-Willamette would provide its existing hospital, equipment and land, and its cash reserves of about $7 million. Triad would become the majority partner in the new entity, based on its larger equity contribution.

Orr said the split would be about 80-20, favoring Triad. The actual split will depend on the results of Triad's evaluation of the hospital and appraisals of its assets, he said.

Under the deal, cash from Triad would be used to pay off McKenzie-Willamette's long-term debt of about $9 million, Shelton said.

The new partnership would pay cash for land acquisition, development and construction of the new hospital, so the new hospital would have no debt payments to make.

Once the hospital was opened, the partnership would then divide any profits on an 80-20 basis, or whatever split the partners settle on. Triad's share would flow to the Triad parent corporation, while McKenzie-Willamette's portion would go to its non-profit arm, which is exempt from taxation. Triad would pay corporate income tax on its profits as well as property taxes for the land and buildings, Shelton said. The nonprofit arm could use its share of the profits for health care work in the community, he said.

Moen said pay levels for workers under the new partnership will be as "good or better" then they are now, and current employees will all keep their jobs. Existing labor contracts, such as the one McKenzie-Willamette has with its nurses, will remain intact, Shelton said.

Triad has agreed to provide at least the same level of charity and indigent care - health services for those who can't pay - as McKenzie-Willamette now delivers, Shelton said.

Shelton said Triad intends to recruit more doctors to work at McKenzie-Willamette and possibly add services, such as a cardiac unit, to be more competitive with PeaceHealth's Sacred Heart Medical Center. The new hospital site will have room for future expansion, he said.

He said the Lane County area needs two strong health care providers to serve consumers and cater to businesses that provide health insurance for their employees.

"We will field whatever range of services needed to be competitive," Shelton said.

PeaceHealth spokesman Brian Terrett agreed that having a strong McKenzie-Willamette Hospital is good for the community.

"We've always been focused on community health, so from a community health perspective, having those 114 beds remain a part of the community health systems is a good thing," Terrett said.

PeaceHealth is most concerned about the balance of indigent care between the two hospitals, Terrett added.

"While we've delivered a majority of charity care in the past, we don't want to become the only provider of charity care in the future," Terrett said.

Shelton said Triad is committed to providing free care for the poor. "We provide as much or more indigent care as any organization in any market we are in," Shelton said, adding that in 17 of the markets where it operates a hospital, Triad is the sole provider and handles all indigent care.

"If you're in this business and you don't have the social responsibility to protect people, you shouldn't be in this business," Shelton said.

Triad is operating against a national backdrop in which many hospitals have closed and many are in trouble because they don't have adequate revenues or capital, Shelton said.

Of the 5,000 hospitals in the United States, two-thirds are in financial trouble and one-third don't have enough capital, he said.

To some business people, that might be a warning to stay out of the field because there's no money to be made in it. But Shelton said it's a business opportunity.

Triad has become a specialist in moving into smaller cities and partnering with cash-poor nonprofit hospitals.

Small community hospitals in similar situations as McKenzie-Willamette usually don't generate enough revenue to upgrade old facilities in order to remain competitive, Shelton said. For example, McKenzie-Willamette put the brakes on a planned $50 million expansion in late 2001 because of poor cash flow.

Triad's broad financial strategy involves raising large sums of money by selling stock, borrowing from banks, or issuing bonds. The company then invests that cash in local hospital projects, typically partnering with nonprofit community hospitals in need of big sums of capital to renovate and expand.

Rather than lending the capital to the nonprofits, Triad often forms a partnership and pays in the capital as its equity contribution to the venture, as it is proposing to do with McKenzie-Willamette. Once the new hospital is built and begins generating revenue and profits, Triad takes a portion of the profits.

Over time, the company hopes to reap an adequate profit to make up for its huge up-front investment of cash.

Is that strategy working? Publicly traded Triad is a young company, formed only a little more than three years ago, so its financial track

record is short.

Already, the company has taken on massive debt to partner with hospitals. The company has $1.8 billion in debt, Shelton said Thursday.

That debt load is expensive to carry. In the first nine months of 2002, the company spent $102 million making interest payments, according to its filings with the Securities & Exchange Commission.

The company's profitability has been volatile. In 1999, the company reported a loss of $96 million on revenues of $1.3 billion. In 2000, the picture improved to a thin profit of $4.4 million on revenues of $1.2 billion. In 2001, revenues surged to $2.7 billion, but the profit dipped to a skimpy $2.8 million.

In the first nine months of 2002, the company reported that revenues were $2.6 billion, and profits hit $106 million.

Triad has deep pockets. As of Sept. 30, the company had $52 million in cash on hand, plus a credit line with a lender for $250 million, according to filings with the SEC. Also, the company has SEC approval to try to raise up to $800 million by issuing bonds, stock or other securities.

But Triad isn't interested in keeping money-losing hospitals going for long.

Shelton said Triad's only other facility in Oregon - Willamette Valley Medical Center in McMinnville - is working well. It's the sole hospital in McMinnville.

But in Roseburg, Triad had little patience for money-losing Douglas Community Medical Center. Triad shut that hospital in February 2000.

Shelton, a veteran health care executive, created Triad in 1999 by purchasing a collection of hospitals from giant HCA in 1999.

Included in that $675 million package was Douglas Community, Shelton said.

The hospital - the smaller of two hospitals in Roseburg - was losing millions of dollars a month, Shelton said, and Roseburg doctors seemed to have no interest in keeping it going. Roseburg's other hospital is Mercy Medical Center.

"If the doctors don't want two hospitals here, then we can't be here," Shelton said.

Bonnie Ford, a former board member at Douglas Community, said many in the Roseburg area dislike having only one hospital now. Douglas Community "should never have closed, but there were just too many things that came into play," Ford said.

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INSIDE Reaction to a suggestion to put the new hospital at the fairgrounds / 9A