Top executives at religious, not-for-profit health systems might want to consider all their constituencies--along with the potential consequences--before moving ahead on a merger with an investor-owned partner.

Demonstrating the power of religion and the worldly might of physicians, two key constituencies coalesced earlier this month to force a turnaround at Baptist Health System, which scuttled a planned partnership with for-profit Triad Hospitals and sacked the chief executive who crafted the controversial deal.

Less than a month after voting to pursue the joint venture with Triad, Baptist's board of trustees gathered July 12 in the company's Birmingham, Ala., headquarters to execute a nimble turnaround triggered by protests from physicians, hospital employees and parishioners demanding that Baptist remain a faith-based system under local control.

The abrupt reversal sends a strong signal that chief executives of religious, not-for-profit systems should think twice about the implications of such a radical makeover. And it comes at a time when two big investor-owned companies--one of them HealthSouth Corp., located a half-mile down U.S. Highway 280 from Baptist's headquarters--face widening financial scandals that have helped sink their stock along with their image.

In the wake of Baptist's retreat from its collaboration with Triad, investor-owned companies, which often entice cash-strapped not-for-profits with the lure of major capital investments, might need more than deep pockets to convince religious institutions that the rescue is worth the ultimate cost, observers suggested.

"You've got to wonder how much, especially in that part of the country, HealthSouth has poisoned the water as far as the perception of for-profits," said Robert Mains, an analyst with Advest, a Hartford, Conn.-based financial-services firm that has tracked the Baptist situation.

Within hours of the Baptist board meeting being called to order at 8 a.m., trustees terminated negotiations with Triad and convened a special executive session to fire Dennis Hall, president and chief executive officer for the past nine years and a principal architect of the doomed deal. At that meeting, five of the 21 board members--including Chairman Bobby Keith Jr., a key Hall ally and confidant--resigned in the bloodletting that began months earlier with a petition-signing protest by influential doctors dead set against any collaboration with an investor-owned hospital company.

"It's gratifying to know that physicians are finally being listened to when they're championing a cause that's so important to them," said Jack Hasson, a pulmonologist at 347-bed Princeton Baptist Medical Center in Birmingham and an early critic of the deal. "It was the right thing for the board to do. It was the right thing for the community, our system and our patients."

Keith, the board's chairman, was replaced by a physician--Michael Drummond, a vascular surgeon at Princeton Baptist. A key player in the board's sudden reversal, Drummond immediately signaled his intention to double the number of physicians on the board, which now includes five doctors.

"Any healthcare system that doesn't listen to its doctors is going to fail," Drummond said. "Certainly, physicians' opinions influenced us. When you have an overwhelming majority--if not all--of the physicians at the three major hospitals (in Birmingham) with such a strong opinion on this issue, you're forced to look at that opinion or you're foolish."

Asked to explain the sea change by the board, Drummond said, "Actually, I think the truth serum comes out as far as voting your conscience the closer you get to having to make a decision."

Standing alone

While Baptist earned $114,000 on operations last year and is projecting similar, break-even results in fiscal 2003 on revenue of approximately $700 million, Hall had insisted that the system could not remain independent and still afford to spend what he estimated was at least $70 million per year on renovations, technology and new equipment. Members of the board finally arrived at the conclusion that Hall's grim outlook was wildly exaggerated, especially considering the system's market share, its geographic dominance and its cash reserves of about $217 million.

In the end, Drummond acknowledged, the board did not concur with Hall's assessment that the system could not fend for itself. He acknowledged that Keith and the other board members resigned because of philosophical differences with the "strong majority" of remaining trustees who felt a partnership with a for-profit system was not necessary for Baptist's survival and ultimately would lead to domination by its for-profit partner.

`No such thing'

Joshua Nemzoff, a hospital consultant from New Hope, Pa., who was hired as an adviser to the board about three weeks ago, said he told trustees during one of his first conversations that "there is no such thing as a joint venture between a for-profit and a not-for-profit when the not-for-profit doesn't lose control."

"Board members asked if it would be possible to do a joint venture with Triad and still have control," Nemzoff said. "I said, `Absolutely not--no one's going to come in, assume debt and assume responsibility for running this system and then not have control."

The elevation of Drummond is another example of a developing trend in healthcare to boost physicians into boardrooms and executive suites, particularly during a time of crisis. Over a period of several months late last year, a handful of hospitals--including Mount Sinai Medical Center in New York and East Jefferson General Hospital in Metairie, La.--named physicians to replace lay businessmen as chief executives (Sept. 30, 2002, p. 6).

Those appointments followed a flurry of activity among insurers about three years ago to name physicians to top management ranks, a strategy that appeased the medical community at the same time it recognized the skills doctors bring to executive decision-making. Among them was Hartford, Conn.-based Aetna, which tapped John Rowe, a physician, as chairman, president and CEO. In May, Rowe, now chairman and CEO of the insurer, was a primary force behind a $470 million settlement of a class-action lawsuit widely hailed in healthcare as landmark in improved relations with physicians (May 26, p. 9).

"It's fair to say that there are an increasing number of activist physician leaders on boards of trustees--especially in the not-for-profit sector," said David Nash, a physician who is a professor of health policy at Jefferson Medical College in Philadelphia and a prominent member of the Tampa, Fla.-based American College of Physician Executives. "Physician leaders at this level exercise tremendous clout when they're active."

But the shift in leadership on Baptist's board, while a conspicuous and dramatic illustration of the strength of the medical staff, reinforces the reality that physicians always have wielded enormous power in hospitals, said Thomas Dolan, president and CEO of the Chicago-based American College of Healthcare Executives.

"The medical staff has always been a major power in every hospital," Dolan said. "This is a well-publicized and highly visible case that just underscores the challenge of being a CEO of a hospital. There are so many constituencies you have to please simultaneously."

William Hynson, Baptist's executive vice president of hospital operations, was named senior manager as Hall's replacement while the board conducts a national search for a new CEO to oversee a system founded in 1922 by a collection of local Baptist congregations.

The board declined to release any information about a severance package for Hall, who was paid about $466,900, plus approximately $104,000 in contributions to an employee-benefit plan, for the tax year ended June 30, 2001, according to a form filed with the Internal Revenue Service. Hall, who worked at Baptist for 23 years, did not return several telephone calls seeking comment.

But in an interview a few weeks before the deal with Triad was announced last month, Hall said he enjoyed the full support of the trustees: "The board has been directly involved in every decision," he said. "They have indicated to me that they have 100% confidence in me."

United front

Until the board meeting on July 12, in fact, Hall had the unqualified support of Keith, who was elected chairman less than six months ago, as well as that of James Daniel, a Birmingham businessman who was re-elected as vice chairman of the board in January. The largest healthcare system in Alabama, Baptist began exploring its options about 18 months ago, hiring Merrill Lynch & Co. to assess its value on the open market after Hall suggested that the system needed help raising cash for capital expenditures. That process sparked protests from many of the system's 9,000 employees, including more than 200 physicians who signed petitions demanding Hall's ouster in the month or so before the board's initial decision to make its pact with Triad.

The well-organized protest by physicians, which in turn helped to galvanize community opposition, was one of the vital factors in forcing the board to reverse course.

"I think it may have been a case of the board not reading the medical staff," Mains said. "They were really up in arms about this deal."

The hasty retreat from the deal with Triad, which owns or operates 49 hospitals, also may illustrate the disillusionment in some quarters of the healthcare industry with investor-owned operators. For instance, Santa Barbara, Calif.-based Tenet Healthcare Corp., still reeling from the controversy stirred by excessive outlier payments and other federal investigations, lost a bid to take over not-for-profit Slidell (La.) Memorial Hospital in April when voters rejected the proposed sale.

The for-profit hospital sector, which represents only about 15% of all U.S. healthcare facilities, has been further tarnished by allegations of massive accounting fraud at HealthSouth, Baptist's Birmingham neighbor.

What's more, the future conversion of church-based hospitals and systems may face a steep hurdle in California, where Gov. Gray Davis last week signed legislation that prohibits any sale that imposes restrictions on services such as tubal ligations or abortions--the same kind of church-based restrictions that would have been included in any deal between Baptist and Triad.

Still, legislative roadblocks and image problems have not yet adversely affected a recent brisk pace in the conversion of not-for-profit hospitals. Last year, in fact, investor-owned firms acquired 41 not-for-profit hospitals, or more than double the previous year, according to Modern Healthcare's ninth annual mergers and acquisitions report (Jan. 20, p. 36). At the same time, only four investor-owned hospitals were converted into not-for-profits.

Tug of war

Richard Wade, spokesman for the American Hospital Association, suggested that the Baptist board's sudden and complete reversal had more to do with its historic mission than it did with any epic struggle between not-for-profits and investor-owned systems.

"I don't think it represents a tug of war between those two sectors," said Wade, whose organization's membership is primarily not-for-profits. "There are plenty of examples of for-profits and not-for-profits collaborating successfully. You can't generalize about these things. It's community-specific and it's system-specific. It revolves around the culture of a particular system. I think this just reflects some deeply felt attachment to the roots of Baptist."

Drummond, who is a Southern Baptist--as he must be to qualify for the board's top position--echoed that sentiment, saying he thinks the deal with Triad was blocked because board members believe there is "something different about the healthcare that is delivered in a faith-based" hospital system. He also suggested that a higher power might have been at work.

"We are unashamedly a Christ-centered, faith-based health system," Drummond said. "Ask anyone on the board, and we all believe that God's will has prevailed for this healthcare system."

Divine intervention notwithstanding, a coalition of forces exerted enough political pressure against the proposed Baptist-Triad deal to halt the conversion of a system formed during Warren Harding's presidency by the Birmingham Baptist Association, the largest denomination in the metropolitan area, with some 150 churches and more than 200,000 members.

"It became a grass-roots movement of people concerned about Baptist losing its identity and its mission," said the Rev. Ricky Creech, director of ministries for the association and an ex-officio, nonvoting member of Baptist's board of trustees. "Can you really partner with a for-profit and really keep the cutting edge, faith-based, spiritual side of holistic health that we try to provide? Can you do that? At some point, do you lose control?"

He also noted the impact of the well-organized protest by physicians. "It was powerful," he said. "The whole lifeblood of the hospital system depends on our medical staff. You have to listen to them."

Hasson, the pulmonologist, said he wasn't surprised that Drummond "showed a deeper understanding (than lay board members) of the function of a hospital system" and the potential problems with an investor-owned partner.

"Doctors work in it--we live in it," Hasson said. "There are so many things a physician brings to the table. I think this is a victory for the system--not just physicians."

Drummond, who said he honed his business skills by helping run his own practice, highlighted the central distinction between faith-based systems like Baptist and a for-profit system like Triad.

"The money we make is not going into the coffers of investors," he said. "We're reinvesting in the community, and that's the right thing to do."

Nemzoff, the consultant who specializes in hospital mergers and acquisitions, said it is "insane" to think that any hospital will spend about 10% of its total revenue each year on capital expenditures. Hall, he said, was either badly mistaken or received terrible advice about the overall financial picture and future strategies of a system he ran for almost a decade. In fact, Nemzoff said, the Baptist system boasts a healthy cash flow of about $65 million, or a cash-flow margin of nearly 10%, which also helped change the board's collective mind regarding the need for an investor-owned partner.

The modest operating income of $114,000 last year, he said, is due in large part to depreciation costs of about $45 million--the result of the system's wide-ranging holdings in buildings and other hard assets. Nemzoff noted that some of those noncore assets could be sold to provide cash for capital expenditures. He said he also expects Baptist to restructure some of its $350 million in debt.

Opt-out opportunity

Though Baptist operates 10 hospitals that cover most of northern Alabama, four facilities had the opportunity to opt out of the deal because of fairly typical clauses that provide for their former owners to either exercise a buy-out option or automatically reacquire the facilities in case of a sale or any change in control of the system. Negotiations with Triad, sources said, never reached the stage where there was any movement either way by these four facilities--97-bed Citizens Baptist Medical Center, Talladega; 176-bed Coosa Valley Baptist Medical Center, Sylacauga; 103-bed DeKalb Baptist Medical Center, Fort Payne; and 228-bed Shelby Baptist Medical Center, Alabaster.

A fifth Baptist hospital, 115-bed Cullman (Ala.) Regional Medical Center, would never have been part of the package because Baptist controls only a 50% stake in the facility, sharing ownership with the Health Care Authority of Cullman County. Like the other four hospitals, Cullman, whose board has long indicated a desire to remain not-for-profit, would have been forced to look for a partner to replace Baptist.

Patricia Ball, spokeswoman for Plano, Texas-based Triad, said the company would walk away from the deal without challenge or complaint. There was no word on what Triad had offered to pay for Baptist. "We wish them the very best and hope things work out the way they want," she said.

In a twist that provided another dose of drama to the trustees' swift turnaround, Baptist's board expressed confidence that the system, which Hall claimed was struggling just to pay its bills, is actually in such robust financial shape that expansion is a distinct possibility over the next several years.

"The trustees simply do not believe that we have to give up control of BHS for our hospitals or the system to prosper," said Gary Furr, a local pastor who is a member of the board. "We can expand our mission without having to forfeit control of our organization in any way."

"When we began to look at our business, we saw strength rather than weakness," Drummond said. "We're going to get better because we intend to get bigger."