KentuckyOne Health To Sell Its Major Assets In Louisville.

Beginning last Thursday, word began trickling out to journalists and the public that KentuckyOne Health, a major regional unit of Catholic Health Initiatives (CHI), was preparing to announce plans to sell almost all its hospitals and medical centers in Louisville and a handful elsewhere in the state. I had been told earlier in the week that the announcement would be made today, Monday, but there were so many leaks that KentuckyOne sent an email to its employees outlining its plans.  I presume KentuckyOne wanted take control of the message before the reportage dam broke. The email can be read here.

For those of us in Louisville, the only major facility not being sold is Our Lady of Peace, a psychiatric hospital.  Both of KentuckyOne’s acute care hospitals, (Jewish Hospital and Sts. Mary and Elizabeth Hospital), the Frazier Rehabilitation Institute, and all four outpatient Medical Centers (Jewish East, South, Southwest, and Northeast) are on the chopping block. Nearby Jewish Hospital Shelbyville, which recently underwent a critical review by the Inspector General for an EMTALA violation, is also for sale.  KentuckyOne employs many physicians. The fate of individual owned- or contracted medical practices in Louisville and elsewhere is not clear to me from the email.

This is not a surprise. The expansion bubble has burst.
KentuckyOne Health was formed when Catholic Health Initiatives (CHI) merged its  St. Joseph Hospital network in Kentucky with CHI’s Jewish Hospital/Sts. Mary & Elizabeth Hospitals in Louisville.  In 2012, after an aborted attempt by University of Louisville Administration’s President Ramsey and Vice-President Dunn to sell state-owned University of Louisville Hospital to CHI, University Hospital became part of KentuckyOne through a joint operating agreement.  From its beginning, the partnership of the University and KentuckyOne did not meet the expectations of either party.  In fact, I have heard from more than one reliable source, that CHI/KentuckyOne floated the sale of one or more of its hospitals earlier over the past 3 years, including Jewish.  As detailed in these pages and elsewhere, KentuckyOne’s operations in Kentucky in general, and Louisville in particular, have been one of the very weakest links in CHI’s national operations. CHI’s bond ratings have progressively fallen and the company has been given a negative rating by several bond-rating agencies. We have seen more than one wave of major layoffs of employees and executives nationally. Quality has taken a hit in Louisville.  To raise money, CHI recently sold off $725 million worth of its medical office buildings.  I understand that there is some $850 million in deferred maintenance of its facilities in Kentucky with a good piece of that in Louisville.  CHI is in the red nationally with respect to operational revenues and is currently exploring a merger with Dignity- another Catholic Hospital System– which itself has a substantial debt obligation. To proceed in such a merger, CHI needs to get its books in better order. I suspect that bad circumstances are demanding even more drastic action.

Much has and will be written about how UofL, Jewish Hospital, and KentuckyOne came to this unfortunate end.  Some will blame it on Obamacared.  It is clear to me however, that the downward slide of Jewish Hospital began long before its operational merger with University Hospital.  Indeed, that partnership was explicitly intended as much to save Jewish Hospital as it was to help University. It has not turned out that way.  KentuckyOne’s collapse gave the University the ammunition it needed to withdraw from the Joint Operating Agreements with minimal if any financial penalties, and perhaps a shiny new hospital to boot.

This is a big deal for Louisville.
Make no mistake about it, our medical landscape is about to undergo a major reorganization. Existing systems and hospitals will seek to adjust their affiliations and rearrange their footprints.  Almost everything medical I can think of is likely to be impacted.  There is too much for me to offer in a single article, but allow me to start with a few highpoints.

Who would want to buy into our present mess?
I am told that KentuckyOne will issue today a Proposal for Purchase. (I do not have such yet. Please send if you have seen it.)  I am unaware if the facilities are being offered as a single unit or in pieces. The four suburban Medical Centers can be used for a variety of purposes and may be easier to dispose of to outside or local buyers for both medical and non-medical uses. I have some doubts about the attractiveness of the acute care hospitals, Jewish and the Saints M&E. Both are operating at less than their licensed bed capacity with closed and unstaffed units. A buyer would need to determine if Louisville still needs as many beds in the same places. Of course, for the right (low) price, a buyer might buy the bricks and mortar for a different kind of medical facility such as a long-term hospital, psychiatric hospital, cancer hospital, physician-owned hospital, or the like. Jewish Hospital sits is in two main parts– an older facility on Chestnut St., and a new hospital tower. Different lookers might be interested in one or the other separately and for different reasons.

An outside buyer needs to appraise the competition it would face. Should a for-profit operator enter Louisville, it would face a buzz-saw of cooperating opposition from the current non-profits just as Humana did. At least one for-profit potential buyer with earlier interests in Kentucky is currently having hard time on its own.

Assimilation of KentuckyOne facilities by existing Louisville entities?
It may well be that CHI/KentuckyOne has already lined up a buyer for some or all of its properties.  Frankly, unless KentuckyOne can insist on a single buyer for all its facilities (it will surely not be able to do so), I think it is likely that other existing Louisville or Kentucky entities will pick of some of the pieces.  Here are at least four, in order of least likelyhood.

Commonwealth of Kentucky/ University of Kentucky.
During my lobbying years beginning with the “Bucks-for-Brains” initiative, I was asked more than once by non-Louisville legislators why we needed the overhead of two medical schools. Why do we?  The lack of cooperation between the two academic medical centers has not always been good for Kentucky.  I have written specifically about how our pediatric cardiology programs and organ transplantation programs have suffered from a studied lack of cooperation with the result that Kentuckians have to go out-of-state for sophisticated services that we ought to be able to provide on our own. The University of Kentucky has already indicated its willingness to provide services in Louisville. The longer it takes for UofL to get its administrative and accreditation acts together, the easier it will be for UK to assume the state flagship role it probably believes it deserves.

An old “new” VA Hospital?
This idea has been floated for some time by those opposed to the site at Brownsboro Road. The University and downtown boosters may now also be pushing the idea. I will be truly surprised to see that happen however. The veterans themselves have been almost universally very much opposed to any downtown location. If the VA Administration and our federal legislators have been listening to the Vets themselves, we will stick with the Brownsboro Rd. location.

I also suspect that the VA itself will have major reservations.  I was a federal lobbyist for UofL when a Robley Rex replacement VA hospital was being contemplated.  The University offered to incorporate the VA into University Hospital.  It was a non-starter from Washington’s viewpoint.  You might imagine that a heavily bureaucratic organization with military roots will stick fairly rigidly to its policy and specifications. They like command and control.  There is a reason that a VA hospital can be identified from afar. While I am on record of favoring incorporating the medical care of our veterans into the same facilities as the rest of us, I do not think we are there yet. That may be more feasible when we have the single payer system that will emerge from the ashes of the meltdown that we may now be entering!  Having said that, the political times, they are a changing. Who knows what backroom arrangements might be possible.

Norton Healthcare.
I expect to see Norton playing a role in the ultimate disposition of at least the downtown KentuckyOne facilities. I predict it will in part do so in collaboration or partnership with the University with which it has begun a refreshed relationship. It is hard to see a new player compete successfully in a downtown acute-care hospital. Norton seems committed to providing services downtown, which is more than can be said about those hospital systems that left for the suburbs without leaving a footprint behind.  Norton has the state’s premier Children’s Hospital adjacent to its existing Chestnut St. location.  There will probably be some anti-trust hurdles to jump over, but control of downtown beds that no one else seems to want could be in Norton’s interest. If I were Norton, I would have my particular eye on the impressive cardiac tower that would give Norton a modern hospital building to supplement its older style facility, and a command of the medical center skyline.

Whoever takes control of the current Jewish Hospital (or Sts. Mary & Elizabeth) will also take control of its licensed beds. These would be available to move around within the county, free of certificate of need restrictions.  This technique has been used before by both Norton and Baptist and provides a valuable side transaction to a purchase.

University of Louisville.
I predict that UofL will emerge from the scrim with control of at least some part of KentuckyOne’s properties. In fact, I suspect it may get some on the cheap as part of the financial settlement currently being negotiated.  UofL might get property instead of promised academic and research funds that it alleged it did not receive, or outstanding clinical billings that were KentuckyOne’s responsibility. The UofL Board of Trustees has already approved a new corporate structure that puts more distance between the University and University Hospital.  Osensively this is to “protect” the University from financial exposure in a time of great changes in healthcare, but it appears to me that the new organizational structure also allows the necessarily UofL-aligned entity to acquire or participate in the management of other hospitals!

A single door for patients to enter University Care.
One of the main reasons UofL entered its partnership with KentuckyOne was to have a facility to admit the private patients of its faculty practices. I doubt that desire has gone away.  If I were King at UofL, I would want control of an attractive clinical facility adjacent to my academic facilities that would expand my hospital options– but not in any way that perpetuates the segregated, separate-and-unequal structure now in place. I will probably write more about this issue in future articles because what scares me the most is what will happen to medical services to indigent, uninsured, and underinsured people of Lousiville as a result of the collapse of KentuckyOne Health.

When I arrived in Louisville in 1984, Norton Hospital was a true teaching hospital for UofL together with University Hospital, Children’s Hospital and the VA.  For purposes of Medical School accreditation, Jewish Hospital was not a major teaching hospital at that time. A teaching hospital has clinical services in which medical students, interns, and residents are regularly scheduled to participate hands-on in the care of all patients. A school of medicine needs to serve a patient population whose population is diverse in both socioeconomic status and diagnoses.  University Hospital alone, as it is, is insufficient.  In those past years, Norton was the largest hospital provider to the Medical School of both housestaff salaries and research support. A change in University administration and a willing participation by Jewish Hospital in the University’s commercial research initiatives swung the always delicate UofL minuet with its downtown partners strongly towards Jewish. The attempt by UofL’s Ramsey/Dunn administration to wrest Children’s Hospital away from Norton was the last bridge to be burned.  Fortunately, the foundation of that bridge in the form of the Department of Pediatrics remained in place.  A new cooperative management structure to run what is now Norton Children’s Hospital is working well and may provide an example for both Norton and the University to cooperatively manage a downtown acute-care hospital, a cancer hospital, a transplantation service, or even a rehabilitation hospital.  All of these services are important for UofL’s School of Medicine. I believe that the University has both the most to lose or the most to gain by what will emerge from the collapse of KentuckyOne.

One does not ask of one who suffers:  What is your country and what is your religion?  One merely says, you suffer.  This is enough for me, you belong to me and I shall help you.   –Louis Pasteur.

I have already alluded to my major concern about how Louisville will deal with its disadvantaged sick following the withdrawal of KentuckyOne. One of the hospital’s oldest names was the Jewish Free Hospital.  In its early years, it was a hospital in Louisville were a Jewish or a black physician or their patients could be served. In a study of breast surgery in Kentucky that  I conducted in the 1990s, I observed that Jewish Hospital still took care of more than its share of minority and indigent patients. The same could not be said of every Louisville or Kentucky hospital.  I do not know to what extent any Jewish Hospital Phoenix arising from the ashes of this mess can keep its name or mission, but I hope it is possible to do so.

Who takes care of the poor now?
One way Medicare supports the charity and teaching missions of its participating hospitals is to pay more for every Medicare admission to hospitals that serve a disproportionate share of the poor, and to hospitals with medical residents. One of the changes of Obamacared was to restructure the distribution of available funding to align better with the actual number of uncompensated bed-days filled by patients at a given hospital. The scope of “uncompensated” is tricky to define, let alone to reliably measure.  In its present iteration, the proportion of bed-days used by Medicaid patients and dual-eligible Medicare-Medicaid beneficiaries serves as a proxy for uncompensated care. To allow hospitals to plan for the coming year, CMS has published a list of the payments they may expect to receive for uncompensated care for this vehicle of hospital assistance.

By this measure, highest on the list was Norton Hospital, which is estimated to receive $21,531,533 under Obamacared . [For Medicare payment purposes, all of Norton’s hospitals are a single entity.]  The University of Kentucky Hospital was second with $14,002,581.  Third on the list was the combined Jewish/Sts. Mary & Elizabeth Hospital with $12,045,312. Fourth on the list was University of Louisville Hospital with $6,845,312.  Next highest on the list is King’s Daughters Medical Center at $4,728,326. The list begins to fall off rapidly after that. [There are hospitals in Louisville/Kentucky which serve a negligible number of Medicaid in-patients. I will write more about this method of quantifying uncompensated care later.]

Obamacared vs. Trumpcaresnot?
Since its passage, Republican administrations subjected Obamacared to a thousand cuts both large and small which diminished its effectiveness.  Shamefully, after hamstringing it, Republicans claim that Obamacared failed and are presenting us with legislation that would take us back to the bad-old-days of the 1980s and 1990s when to have a preexisting illness, or to be unemployed, or to have a partner who was sick, or to be “too expensive to ensure,” effectively cast one to the wolves.

What is going to happen if Jewish and Sts. Mary & Elizabeth Hospitals are no longer part of the fabric of healthcare services in Louisville?  Who will help take care of the poor?  Medicaid expansion was a godsend to patient and provider alike in Obamacared and Beshearcared Kentucky.  Safety-net primary care centers made enough money that they could offer additional essential services.  University Hospital made enough profit that in addition to its revenues being bled off for University research, it supported Jewish Hospital which was not making a profit. The old back-stop Quality Community Care Trust fund (QCCT) that supported indigent care at University Hospital went into hibernation because it was no longer needed.  Neither state or local government pay into it any more. I have made clear my concerns that the QCCT perpetuated a second-class system of care for the poor and minorities.  However, if the tag-team of President Trump and Governor Bevin balance their budgets by reducing healthcare services for those who need them, our hospitals and community clinics will collapse under the unfunded burden, and services available in the private arena will go away. Cross-subsidization only goes so far when even those whose medical expenses are paid through arrangements made by their employer or governments are already impossible to manage.

This missive has gone on overlong and I need to stop.  KentuckyOne and UofL have kept a lot close to their chests. Few know how bad or good things really are.  I certainly do not.  I assert however, that while what they may have been agreed between them may serve the two parties well, what happens now is also of critical interest to all the rest of us. What is good for General Motors may not be good for Louisville or Kentucky.  I encourage my readers to help flesh out the facts and ramifications of what is coming.  If I have misstated any facts, help me correct them.  If you have information that is relevant, let the rest of us know.  Contact me privately as a conduit if you feel better that way. (See sidebar address.)

Peter Hasselbacher, MD
President, KHPI
Emeritus Professor of Medicine, UofL
15 May 2017

2 thoughts on “KentuckyOne Health To Sell Its Major Assets In Louisville.”

  1. What will happen to the share of KentuckyOne which is owned by the Jewish Heritage Fund for Excellence (Isn’t it around 20%?). What I could see happening would be JHFE donating Jewish/Frazier/Medical Centers to UofL with Sts. Mary and Elizabeth being sold. Because Jewish serves such a critical role for certain departments of the UofL School of Medicine (Cardiology, Rehabilitation, Surgery, Emergency Medicine, Family Medicine, Neurology) I think that UofL needs somehow to either take back those services (which would be almost impossible without an investment of hundreds of millions into University Hospital) or to acquire Jewish. It is also true that Jewish has services which could be beneficial to a truly combined University-Jewish Medical Center. They have a brand-new ER, hybrid OR and newer inpatient units with opportunity for expansion on shelled out floors in the Frazier Tower.

    Is it not also true that UofL or the state owns the land which Jewish Hospital sits on in a similar situation as Children’s Hospital? Is there some sort of limitation which would give the land back if the hospital closed as an acute care facility? The involvement of the Jewish Heritage Fund for Excellence keeps the door open a bit to raise the question about if the Jewish community wants to continue to have a Jewish hospital. It is depressing to see an institution which was once so wonderful fall to a low point. I think that it served as a source of pride of the Jewish community and was truly an institution which brought people together. I sadly think that JHFE has displayed a lack of leadership on this issue and has strayed from the original, healthcare related, mission of JHSMH/JHHS/Jewish Hospital.

    I hope that an announcement will come soon and the employees and patients of Jewish/St. Mary’s don’t have to wait much longer in fear. I think your analysis is spot on by the way. I do think that Norton will shy away from purchasing the KentuckyOne facilities because what they have is working for them and they have little reason to buy Jewish. I think that Norton wouldn’t pass an antitrust case in any case and would be subject to years of FTC analysis which would make a deal very hard to get through with the time sensitive nature of KentuckyOne’s situation. I think Baptist could be an interesting partner and it would be interesting to see if they would be interested in increasing their level of academic involvement. They are, however, in a difficult financial situation and without a permanent CEO I’m not sure they have the leadership to go with this. With the return of Ken Marshall to University Hospital I think that there is a nexus of leadership there that could take on a project like this. 

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