Shifting landscape Cash-rich Blue Cross and Blue Shield backs merger talks between the financially challenged Landmark and Roger Williams medical centers BY STEVEN STYCOS

SIGNALING CHANGES in Rhode Island’s healthcare system, Roger Williams Medical Center in Providence and Landmark Medical Center in Woonsocket are discussing a merger. According to hospital industry insiders, the hospitals would merge, close the two existing institutions and build a new hospital in Lincoln. The talks, which began last summer, are being facilitated by the Ocean State’s dominant healthcare insurer, Blue Cross and Blue Shield of Rhode Island.

Declining to discuss ongoing merger discussions in detail, Roger Williams CEO Robert Urciuoli says, " At some point, we’re going to have to start constructing new facilities and this might be the point for us to partner with other hospitals, including Landmark. " A new combined facility would reduce overhead and be more efficient, Urciuoli says, adding, " We can build a brand new hospital for less money than adding to existing facilities. "

Roger Williams is currently using the Blue Cross-financed Statewide Health Assessment Planning and Evaluation Study (SHAPE) to carefully determine the best plan, Urciuoli says. " This new hospital, given the conditions of hospitals today, will be around for 40, 50, 60 years, " he notes. The longtime hospital head expects to have a more definite project to announce in about 60 days. " Blue Cross is helping to facilitate the discussion, " Urciuoli adds, " and I’d kind of like to leave it at that. " Blue Cross president Ronald Battista and Landmark CEO Gary Gaube were out of town and unavailable for comment.

The new hospital plan would require approval from Attorney General Patrick Lynch and the Rhode Island Department of Health and inevitably produce a firestorm of criticism, particularly if Blue Cross is involved. But the new hospital plan also illustrates several significant developments in Rhode Island’s hospital industry — the rapid collapse of Landmark Medical Center and the burgeoning financial power of Blue Cross.

A health department survey of Rhode Island hospitals published in March indicates that Landmark was in the worst financial condition of any of the state’s 14 hospitals. The survey found that the 214-bed Woonsocket hospital was carrying a high debt and had low profitability. As a result, survey author Bruce Cryan found, Landmark’s value declined drastically from 1998 to 2001 (2002 figures are not yet available). During that period, the hospital’s net assets, or the value of all its property minus its debts, declined from $28 million to a mere $6 million, a 79 percent drop. The hospital has only survived in recent years by dipping into its endowment, but if the trend continues, the reserve money will be exhausted and the hospital will be bankrupt.

Meanwhile, Blue Cross flourishes. The healthcare giant is getting both bigger and richer. According to annual health plan data filings at the health department, Blue Cross’ dominance has grown dramatically in recent years, from 56 percent of the Rhode Island’s private insurance market in 1998 to 72 percent in 2001 (2002 figures are not yet available). Meanwhile the nonprofit corporation’s reserves, or financial assets, have boomed, growing 36 percent just from 2000 to 2001. The giant insurer, according to its 2001 audited financial statement, now has $223 million in reserves, making it a financial powerhouse in the local healthcare industry.

The condition of the third player in the new hospital deal, Roger Williams Medical Center, is middling. The hospital’s overall financial performance was slightly negative, according to the Cryan report. Roger Williams barely rated a positive score for profitability, and it had problems with its debt and a decline in the value of its net assets. From 1998 to 2001, Roger Williams’ net assets declined 18 percent.

The three institutions’ financial conditions are major factors in pushing the new hospital deal. Poor finances, especially at Landmark, mean that something drastic must be done, but securing bank loans for a huge project, would be extremely difficult. Meanwhile, Blue Cross is rolling in money and looking for a place to use it.

THE NEW, COMBINED hospital being discussed would be located in Lincoln — near the Amica Mutual Insurance Company headquarters at the junction of Route 146 and Interstate Route 295 — according to sources, all of whom requested anonymity because of their role in the healthcare industry A facility of about 250 beds, is being considered, according to one source.

In addition to providing a new building to replace the aging Landmark and Roger Williams structures, the Route 295 location would place the new hospital in the middle of one of Rhode Island’s growing suburban areas, with ready access to nearby southern Massachusetts communities. " Demographics would probably play the most significant role in determining where this new hospital should be built, " says Urciuoli.

Although Our Lady of Fatima Hospital in North Providence and Memorial Hospital in Pawtucket would probably suffer from the competition of a new, nearby hospital, the City of Woonsocket would be a biggest loser if the merger plan is finalized.

Landmark is a community hospital and a major local asset in the sagging mill town, which has never recovered from the exit of the textile industry after World War II. Landmark has nonetheless fared poorly in the recent reorganization of the healthcare industry. In the late ’90s, it hoped to become a regional force by merging with for-profit Tenet Healthcare. In preparation for the sale, says Mary Kozik, Landmark’s vice president of public relations, Landmark cut ties with local physicians, anticipating that Tenet’s doctors would replace them. It also invested $1 million in lobbying to win government approval of the deal just in 1997, according to its tax returns. But responding to an outcry of opposition to for-profit medicine, the General Assembly passed legislation, over Governor Lincoln Almond’s veto, barring any company from owning more than one hospital in the state.

Shortly afterwards, the deal collapsed, says Kozik. " It was devastating, " she says. " It killed us. " The hospital lost another 7000 patients, she says, when Harvard Pilgrim Health Care of New England went out of business. Recently, Landmark’s finances have improved, Kozik explains. It ended its most recent fiscal year on September 30, 2002, with a loss of only $1.6 million, after a $5 million loss in 2001. Continuing the trend, she says, " We truly hope to end the year [2003] at break even, but it’s difficult. "

Kozik says she is unaware of the merger plan and that only Landmark CEO Gary Gaube, who was on vacation as the Phoenix was going to press, could discuss it.

Like Landmark, Roger Williams worked to sell itself to a for-profit hospital chain in 1997 — Columbia/HCA Health Care Corporation. But that deal also fell apart as the huge corporate giant was investigated for Medicare fraud, and the Hospital Conversion Act discouraged for-profit empire building in Rhode Island. Although its financial condition is not as dire as Landmark’s, Roger Williams is something of the odd man out in the Providence hospital scene. One healthcare expert notes that Jews have traditionally gone to The Miriam Hospital, Catholics to Fatima, and Yankees and those needing speciality care to Rhode Island Hospital. This leaves Roger Williams without a niche or base to build financial strength.

Neither Landmark, nor Roger Williams, has the money to build a new hospital, especially considering how state policy requires hospitals to provide 20 percent of the money for capital projects up front. That’s where Blue Cross, with its brimming vault of reserves, enters the scene. But not everyone is happy with the concept of Blue Cross helping build a new hospital.

The idea " raises all sorts of flags, " says Marti Rosenberg, executive director of Ocean State Action, a labor-backed group active on healthcare issues. Referring to Blue Cross’ recent advertising campaign that 87 percent of premium dollars are spent on claims, while only 10 percent go toward administration and three percent for reserves, she says, " Which part of the 87-10-3 does that come out of? Why should my premium dollars go to finance one hospital? Why shouldn’t the premium dollars they’re receiving go to finance healthcare, provider reimbursement, and the scope of payments they’re supposed to be providing? "

If Blue Cross owned part of a hospital, Rosenberg says, it could participate in " all sorts of financial shenanigans " by cutting reimbursements to competing hospitals and directing business to its hospital.

Other healthcare sources are puzzled at Blue Cross’ role. " I can’t figure it out, " says a source knowledgeable of the hospital industry. " Why would they spend their political capital on merging two hospitals? "

Blue Cross’ move into a larger healthcare role is nothing new. It started to take a wider role in healthcare policy by financing the SHAPE study, which forecasts Rhode Island’s healthcare needs and is now being used by Roger Williams to plan the new hospital.

When SHAPE was released in November 2002, critics blasted the study’s $3 million cost and complained that Blue Cross was throwing its weight around and meddling in a function best performed by government and health care providers. In April, Blue Cross began Phase II of the project, which includes the formation of SHAPE RI Foundation (the group is not affiliated with the Rhode Island Foundation). According to a confidential outline of the meeting, the foundation will " advance the quality and efficiency of RI’s health care system. " Among its " key charges " are to " minimize redundancy, duplication and inefficiencies in the current health system, " and " facilitate alignment of healthcare resources. "

Whether this includes a new hospital in Lincoln is unclear. Blue Cross President and CEO Ronald Battista is out of town until the end of the week, says Scott Fraser, Blue Cross’ assistant vice president of public relations, and unavailable for comment. " I have not been briefed on anything along these lines, " Fraser says. The spokesman, however, defends Blue Cross’ increased role in healthcare planning. " We think it’s important not just to pay claims, but to look at healthcare needs five years down the road, " he says. Shape Phase II is just beginning, Fraser says, and has no timetable, specific goals, or price tag.

Should the new hospital plan move forward, it will have a daunting regulatory obstacle course to navigate. The 1997 Hospital Conversion Act requires that both the Rhode Island Department of Health and the Attorney General Patrick Lynch review and approve a 20 percent change in a hospital’s ownership. Under the law, the two state agencies must ensure that community access to healthcare and charitable assets are protected. The law also requires Lynch to identify any possible conflicts of interest.

Finally, the new hospital plan would require approval through the health department’s certificate of need process. Governor Donald Carcieri proposed eliminating the program as part of the state budget, but healthcare industry sources say changes in the existing law are far more likely. Even if changed, the law would certainly require extensive review and approval of a new hospital to ensure that it would improve healthcare in Rhode Island.

Rosenberg, a leader in the drive for the Hospital Conversion Act, has no immediate reaction on whether a new hospital would be a good thing, but says, " That’s precisely why it’s so important we have the Hospital Conversion Act. " She encourages the two hospitals to be open about their merger plans, so the public has ample time to consider them.

Steve Stycos can be reached at ch1650@ pol.net