In a nutshell: This kind of venture is precisely why the new company was formed within the past year as a subsidary of its parent company, Hospital Management Consulting.
“It’s been a development effort I’ve been working for about 21⁄2 years,” Arthur said. “I’ve worked with about 800 hospitals in the United States, out of about 5,000 total.
“About 80 percent of the hospitals I’ve worked with are very much like Hillsboro’s. They’re older facilities that have kind of aged in place over time.”
He said most of the hospitals in rural America could never create the capital formation on their balance sheet to do a major investment in a plant and equipment.
“A couple of years ago I started looking at this as a way to bring capital to the rural market,” Arthur said. “What I found was that the best vehicle to do that was to bring private sources of equity, make an investment in equipment and bring the facilities to state of the art.”
HCMC would be the company’s fourth project. The three hospitals HMC/CAH has already acquired are in Plymouth, N.C., and Norton and Oswego, Kan.
The company also has an asset-purchase agreement in place for the hospital in Drumwright, Okla., and has 17 additional rural hospitals “that are in different stages of acquisition.”
Arthur said the company has a plan to develop a 40-hospital system.
“We think that’s probably the right amount that will be efficient to operate in this system,” he said.
Why focus on rural hospitals?
“Rural communities face primarily the issue of competing with new facilities in larger communities,” Arthur said. “I don’t think they compete with their neighboring community as much as with the hospitals in the city that are viewed as state of the art.”
He said the age and appearance of a facility makes an impression on potential clientele.
“Your patients in this area make a decision every time they seek health care on the basis of what they normally can see,” Arthur said. “When they see something new and shiny and state of the art, they have a comfort level that that’s where they want to be.
“It may have no reflection at all on the people who give care to them on the front lines, because many times they would rather be taken care of by their family, friends and neighbors,” he added.
Even if a rural hospital manages to operate financially in the black, few can generate the additional capital it would require to build a new facility.
“What we try to do is bring the one element that is kind of missing from your operation and ensure health care for your community for the next 30 to 40 years by the fact that we will make an investment back into the plant and equipment,” Arthur said.
“Once we build a hospital in a community, we don’t expect that hospital to go away.”
Arthur said a project like the one proposed for HCMC can generate a positive result for all parties involved.
“We view the opportunity as a win-win situation for everyone,” he said. “The community wins by having a state-of-the-art facility in it that will provide health care for the next 30 years.
“We win, naturally, because we’re in the business of operating and owning hospitals.
“And patients win because they have a place where they now have confidence in.”
Arthur said record-high fuel prices will only make the local hospital all the more attractive in the future.
HCMC is currently a non-profit institution. The for-profit hospital that HMC/CAH plans to build will be on the tax role.
“We become a tax-paying citizen of the community,” he said.
Attraction to Hillsboro
Why did HMC/CAH choose Hillsboro and HCMC over other options?
“To be honest, we have a number of different targets that we’ve identified as potential acquisitions,” Arthur said.
“We want a community that is solid enough to know that if we make a 30-year investment, we’re going to see a 30-year return on that investment,” he added.
“We think this is an outstanding community. I compliment you all because you’re right there at the top with the other (hospitals) that we’ve acquired.”
Meanwhile, city officials were asked whether local leaders did their due diligence regarding the integrity of HMC/CAH.
Dalke said both the city and the hospital had their respective attorneys investigate the company’s track record.
Bond attorney J.T. Klaus said he spent most of the past eight weeks doing legwork on behalf of the city.
“The acquisition company itself was formed specifically for this purpose,” Klaus said. “That’s why the city requires that the parent company guarantee, basically, the construction of the new hospital.”
Klaus added the company will come up with about $1.2 million in private capital to retire the city’s indebtedness on the current facility through Public Building Commission revenue bonds.
“That says something about their liquidity as well,” Klaus said.
Mike Ryan, HCMC chief executive officer and administrator, said HMC/CAH also did its due diligence on the financial position of the local hospital.
“They requested mountains of documents from us, had attorneys and accountants come down and do an audit of our books—that sort of thing,” Ryan said.
“Our board made several trips to some of the sites (owned by HMC/CAH), visited those facilities and talked to the employees down there just to make sure they’re doing what they say they’re doing.
“There are hard assets to back it up.”
Arthur said, in the end, community support was a key factor in the decision to acquire the hospital in Hillsboro.
“There are 1,300 rural communities very similar to Hillsboro out there,” he said. “What we’ve done is go to those communities where we can get community support to do what we’re talking about doing.
“If we don’t have support in those communities, our board has a set criteria—there’s no use for us being there.”
Profitability in volume
If HCMC managed to generate only a modest profit as a non-profit institution, how does HMC/CAH expect to make enough money as a critical-access hospital to recoup a possible $10 million investment?
“(The critical-access hospital program) breaks even on the Medicare side,” Arthur said. “There again, hopefully, the commercial side generates some money for us.
“This is not a business I’m just coming into,” he added. “I’ve been in it for 30 years, so I understand the…kind of the mess we have overall in health care. Again, what we look for are solid communities where there’s an opportunity to serve patients in the best way possible.
“What I’ve found over time is that volume cures a lot of ills, and if you build a facility and providers that patients want to come to, then over the long run it takes care of itself.”
“That’s the bet we’re making, and we’re betting with a lot of money that that’s the case.”
Arnold said the hospital in Drumwright was averaging a daily census of around three patients. Now, in a new facility, the average census is between 10 and 15.
“I hate to say it’s a ‘Field of Dreams’ if-you-build-it-they-will-come, but people have a sense that if they can get something comparable in their community rather than getting in the car and drive somewhere, they’d rather not drive.
“That’s been our experience.”