Build It, They Will Come? Despite Hard Times, Can Tennova Afford Not to Build a New Hospital?

Despite the turmoil surrounding its parent company, Tennova appears to be proceeding with plans to build a hospital on Middlebrook Pike to replace the one off Broadway that we've always called (and still do) St. Mary's.

There is skepticism in the medical community that the hospital will be built, though it would appear that Tennova doesn't have any choice. The old St. Mary's building is outdated so a new building has to be constructed. The hospital is losing doctors. The decision to go west of downtown rather than stay northeast is also a contentious matter, but is there any choice there either?

Another hospital answered the siren's call of "go west." Profitable Baptist Hospital on the banks of the river downtown built a hospital out west, where the doctors and the patients with the best insurance live. They went bankrupt when the doctors didn't cooperate.

That hospital is now owned by Tennova, but it's too small, the professional buildings are owned by a third party, the site is landlocked and has deed restrictions. The stupidity of the Baptist administration knows no bounds.

The doctors are the people who decide where hospitals are located and whether they will be successful. They control their patients. And many of the doctors live out west—and to keep them or bring them back, the new hospital has to go west.

Complicating matters is the turmoil in Tennova's parent company, HMA. Glenview Capital, a New York hedge fund and the largest stockholder in HMA, has been trying to replace the board of directors because of low revenues and a depressed stock price. Then the HMA board announced the sale of the company to Community Health Systems in Franklin, Tenn. for $3.6 billion (and Community will assume $3.7 billion in debt). The sale has to go through some regulatory hurdles and is expected to close March 2014 if 70 percent of shareholders approve.

But regardless of what happens with the parent company, it will be an on-going multi-billion dollar hospital chain, albeit one with a huge debt. And that entity, if it is to compete in the Knoxville market, has to have a new hospital. Local skeptics say the parent company could buy a lot of community hospitals with the estimated $300 million a new hospital would cost. But if Tennova is to retain its doctors (and thus its patients) they have to pursue building the new hospital.

Though Community Health Systems has been on an acquisition spree in recent years, it seems to have the confidence and backing of major lenders like Bank of America. When this deal is done it will have 206 hospitals in 29 states and own more hospitals than any other company.

The Tennessee Hospital Association says two-thirds of the hospitals in the state have a negative operating margin. That's medi-speak for they are losing money.

Complicating things for state hospitals is the refusal of state government to take the expanded Medicaid (TennCare) money that covers patients up to 133 percent of the poverty level instead of 100 percent.

In his state of the state speech in January, Gov. Bill Haslam admitted that there are "hospitals across the state, many of them in rural communities, that are going to struggle if not close under the health care law without (Medicaid) expansion."

In a deal to get the Medicaid expansion, hospitals agreed to give up some direct payments, most notably extra money for hospitals that have a lot of charity cases. So hospitals in Tennessee are going to lose revenue, but they won't get the offsetting Medicaid money unless the state agrees to take it.

In past years, struggling rural hospitals have affiliated with large hospitals in the cities, acting as feeds to the mothership. But given the state of the hospital industry and the lack of the Medicaid money, one experienced hospital executive I talked to said these affiliations may no longer look attractive to the larger hospitals.

So it is a challenging time for all hospitals, but even more so for those in Tennessee.