Merging for a Better Future?

Proposed Southwest-PeaceHealth affiliation moves forward

Every organization wants local control, but sometimes you have to give up a little independence in exchange for financial strength and breadth and depth of services.

At least, that was the conclusion reached by the board of directors of Southwest Washington Health System in March, shortly after the Vancouver-based health provider approached PeaceHealth about a possible affiliation between the two organizations.

"We've asked ourselves, ‘Can a large independent hospital thrive in this medical care market?'" said Joseph M. Kortum, president and CEO of Southwest. "This time the decision weighed in on the alignment side."

Kortum said that they began considering affiliating with a larger healthcare organization about a year ago – a decision made independent of the economic downturn. Rather, according to Kortum, it was a question of successfully competing in what he referred to as "one of the most competitive healthcare environments in the U.S."

A representative of one of those competitors, Legacy Health System, downplayed any immediate impact on the regional healthcare market by a potential PeaceHealth-Southwest affiliation. "In the short term, things won't change in the Clark County market," said Jonathan Avery, chief administrative officer at Legacy Salmon Creek.

Instead, Avery viewed the possible deal as a positive development for the region's healthcare industry. "In the long term, the affiliation will provide SWHS with access to greater capital, allow them to raise money easier and it will be good for the community as it continues to grow," he said.

Lee Kearney, chairman of the board of directors for Southwest Washington Medical Center, said they considered all three major regional healthcare players – Legacy Health System and Providence Health and Services in Portland and Bellevue-based PeaceHealth. In the end, Kearney said the board felt that a potential deal with PeaceHealth would "retain local board autonomy" for Southwest.

Who gains what?

Representatives from PeaceHealth and Southwest have been meeting weekly since mid-March, said PeaceHealth chief strategy officer Peter Adler.

"It's going extremely well," Adler said. "We haven't hit one speed bump yet."

Both Adler and Kortum said they were excited by the possibility of an affiliation between their organizations, citing benefits for both PeaceHealth and Southwest, as well as for the community.

On Kortum's list of institutional advantages of affiliating with PeaceHealth were lower purchasing, IT and administrative support costs; less expensive access to capital and what he termed as "bench strength."

The affiliation, said Kearney, would provide more layers of management and allow for collaboration between SWHS's physicians and their counterparts at other PeaceHealth hospitals. "Right now, we're one layer deep in all areas," Kortum said. "One CFO, one VP, etc."

PeaceHealth, too, says it stands to gain from the affiliation. "Southwest offers an array of services that we don't have," Adler said.

Two notable examples, he said, were Southwest's Columbia United Providers program, which provides managed care for Medicaid patients, as well as the organization's family practice residency program, which he called a "model in the industry."

But Adler said the bottom line wasn't the only factor that attracted Southwest to PeaceHealth, and vice versa. "Our mission and value systems are an extraordinarily good fit," he said. "Like a hand and a glove."

The two organizations already have plenty in common – both are nonprofit healthcare organizations founded by Catholic nuns in the mid- to late-1800s and share a stated commitment to serving all people, regardless of their ability to pay.

For example, PeaceHealth provides more than $100 million each year in charity and uncompensated care, according to Adler, while Kortum said Southwest's charity care reached $75 million last year, up from $15 million in 2003.

What's next?        

Adler and Kortum expect the affiliation due diligence process, along with the requisite regulatory hurdles, to be complete by the end of this year.

One result of the affiliation could be that PeaceHealth may consolidate its shared services (such as billing and IT), currently based in the Puget Sound region, into a primary shared service center, which Adler said may be located in the greater Vancouver area.

"We have evaluated multiple locations in Oregon and Washington," Adler said, "and the Vancouver-Portland area clearly rose to one of the top considerations."

Adler cited the region's transportation infrastructure, growth expectations and general quality of life as primarily motivators for potentially relocating some services to the area.

However, he said PeaceHealth is still in the beginning stages of assessing each shared service to see which ones make sense to be consolidated. "We're nowhere near knowing how all of this would work," Adler said.

But he did say that "the call from Southwest accelerated our thinking about a shared service center," and that if and when the deal was finalized, "we will secure the location."

A little sadness, some excitement

The decision to affiliate with another healthcare organization may have been looming, but for Southwest associates like Kortum, there was still a feeling of regret that the Vancouver institution's long history of independence may be coming to an end.

"Every decision like this is a mixed blessing," Kortum said. "There are advantages of being independent, such as more nimble decision making. But it's a new, exciting adventure."

Adler shared Kortum's excitement. He said that the proposed affiliation was "very positive for the community, the economy and patients."