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Sherman may be next as hospitals combine into bigger and bigger chains

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Area hospitals, by size, with number of inpatient beds and owner:

Central DuPage Hospital, Winfield — 313 — Cadence Health

St. Alexius Medical Center, Hoffman Estates — 310 — Ascension Health

Edward Hospital, Naperville — 309 — Independent

Provena Mercy Medical Center, Aurora — 299 — Presence Health

Sherman Hospital, Elgin — 255 — Independent

Rush-Copley Medical Center, Aurora — 193 — Rush

Centegra-McHenry Hospital, McHenry — 181 — Centegra Health System

Provena Saint Joseph Hospital, Elgin — 178 — Presence Health

Advocate Good Shepherd Hospital, Barrington — 169 — Advocate Health Care Network

Delnor Hospital, Geneva — 159 — Cadence Health

Centegra-Huntley Hospital, Huntley (to open 2016) — 128 — Centegra Health System

Centegra-Woodstock Hospital, Woodstock — 86 — Centegra Health System

Centegra Specialty Hospital, Woodstock — 76 — Centegra Health System

Mercy Harvard Memorial Hospital, Harvard — 65 — Mercy Alliance

SOURCE: Illinois Dept. of Public Health, Calendar Year 2010

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Updated: August 30, 2012 6:16AM

When Dr. Raymond G. Scott opened the first hospital in Geneva in 1908, it was in a 58-year-old house on Third Street. Named for the architectural style of the mansion, this Colonial Hospital had beds for nine sick people on one floor. On another floor were beds for Scott, his wife and his children, who continued to live in the same building.

Three mergers and 104 years later, the descendant of Scott’s home/hospital is a not-for-profit corporation named Cadence Health. It has operations in 70 buildings spread across two counties, including two full-service hospitals with 472 beds. It has 6,100 employees, not one of whom lives in the hospital or office building or care center or fitness center where he or she works.

A couple decades earlier, the Elgin Woman’s Club had decided in 1888 that not every illness and injury in the Watch City could be taken care of by a house call from the family doctor. Businessman Henry Sherman gave the club a two-story house for medical use at the southeast corner of Channing and North streets — on condition that the facility be known as Sherman Hospital. It opened with four rooms for patients plus one operating room.

Henry and those 1888 ladies would never recognize the Sherman Health System that grew out of that humble house, with what is now a 255-bed hospital, 2,200 employees, the Sherman West Court nursing home, three urgent-care centers stretching from South Elgin to Algonquin, and two medical office buildings.

The hospitals of today — usually supported by a swarm of care centers and office buildings and imaging centers and labs and fitness centers and maybe even a nursing home or senior housing complex or two — have come a long way from your great-grandpa’s homey, independent local institutions. And it’s likely that this fall, Sherman Health Systems and Cadence Health may join to become one even bigger organization, as Sherman joins the trend of every hospital becoming part of a chain of multiple hospitals.

If Sherman does get bought or merged — either by Cadence Health or by the even larger, 12-hospital Advocate Health Care Network — the only independent hospital left in the far-west suburbs will be Edward Hospital in Naperville.

And even the chains are getting bigger, as evidenced last November when Provena Health System — which owned Elgin’s Provena Saint Joseph Hospital plus Provena Mercy Medical Center in Aurora, Provena St. Joseph Medical Center in Joliet and several other hospitals — merged with Resurrection Health Care, another Catholic chain that owned hospitals in Chicago and the suburbs.

Sherman decides

Housed for the past three years in a state-of-the-art new building along Randall Road, Sherman Hospital and its parent Sherman Health Systems seem to be in the catbird seat among Elgin-area hospitals. Supported by a network of care centers and doctors’ offices, it is the closest hospital to a heavily populated region extending westward to Hampshire, northward to Huntley and southward to South Elgin. Only Provena Saint Joseph Hospital, located just a couple miles away on Elgin’s West Side, competes seriously in Sherman’s core area.

But Sherman has three chinks in its armor. First, the construction of that new building in 2009 left it with what is now $277 million of debt, including $170 million borrowed to help pay for the new building, according to Controller Mike Mulay. While the system’s income from operations is one of the healthiest among Chicago-area hospitals, according to Mulay, interest on the debt and depreciation of the bigger physical plant have left Sherman with red ink over the past few years, estimated recently by Crain’s Chicago Business as $8 million in fiscal 2010-2011 and $1.9 million in the past fiscal year.

Secondly, health-care reform and insurance company provisions that encourage patients to be treated on an outpatient basis have combined with lower-than-expected population growth in the area to push down the number of patients using those 255 new inpatient rooms. Sherman’s inpatient occupancy rate is now just 60 percent.

And thirdly, two hospital chains each want to steal part of Sherman’s customer base by opening a new hospital in McHenry County — Centegra Health in Huntley, Mercy Health System in Crystal Lake.

Testifying last year at a state hearing, Sherman CEO Rick Floyd said the creation of a new hospital in McHenry County would make it hard for Sherman to continue as an independent organization. In December, the Illinois Health Facilities and Services Review Board voted to deny “certificates of need” for both McHenry County proposals. But even without the new competition, Floyd and the Sherman board apparently already had begun trying to arrange a marriage with a bigger, deep-pocketed chain.

That flirting became even more urgent last Tuesday when the state board, reconsidering the McHenry County applications, voted 6-3 to approve construction of Centegra’s Huntley hospital. The board is expected to rule on Mercy’s Crystal Lake plan in September.

Two finalists

Sherman spokeswoman Tonya Lucchetti-Hudson said Sherman “has been approached by many systems over the past few years.”

Hudson said that in recent months Sherman asked 11 potential suitors to “submit information.” Those included the parent of Provena Saint Joseph Hospital, Presence Health. But apparently either Presence was not interested in submitting an offer or Sherman decided at that point not to continue pursuing Presence as a possibility.

Five hospital chains were interested, Hudson said, and Sherman sent each of those a “request for proposal” about buying, merging with or otherwise allying. Since then, Sherman’s leaders have whittled down that field to two finalists — Cadence Health, as the 2011 combination of Delnor Hospital in Geneva and Central DuPage Hospital in Winfield now calls itself, and Advocate Health Care Network, a nationwide Oak Brook-based chain whose nearest existing hospital is Advocate Good Shepherd in Barrington.

“Sherman selected Advocate and Cadence as the partners who best fit the selection criteria,” Hudson said.

She added that “there are many different models for potential partnership that are being explored with these two organizations” besides an outright purchase.

Hudson said Sherman’s board will decide sometime this fall whether to pick Cadence or Advocate as its new partner, “which will be followed by many months of due diligence.”

The other three chains that were interested enough to submit proposals for Sherman, according to Hudson, included Ascension Health, a nationwide Catholic chain which recently acquired St. Alexius Medical Center in Hoffman Estates and Alexian Brothers Hospital in Elk Grove Village; Chicago’s Rush University Medical Center, which is involved in the Rush-Copley Medical Center in Aurora; and Trinity Health, a large Catholic network based in Michigan.

Bigness benefits

If almost everybody is doing it, there must be some advantage to merging with other hospitals and forming big chains. Not surprisingly, that advantage is financial.

At an extreme, combining two hospitals into one corporate structure can allow both to be physically combined into one campus, as happened after Delnor Hospital of St. Charles merged with Geneva Community Hospital in 1986. But completely closing a hospital is rare, and requires approval from the state board. Susan Milford, senior vice president of Centegra Health System, notes that a merger allows consolidations at a less drastic level that save money and, arguably, even improve patient care.

Multiple locations “allow (a chain) to leverage resources and put the right services in the right place,” Milford said. “For example, you want an emergency room within a reasonable distance of every home, so you probably would leave one of those at each hospital. You’d probably even want the offices for primary-care physicians near each location.”

But for expensive services that aren’t used by as many people, such as diabetes centers, heart-surgery centers and cancer centers, patients are willing to travel farther, Milford said.

“One wound center with a bariatric chamber can serve an entire county. You don’t need one at every hospital. We chose to put ours in Huntley, because of the larger population of older people there. We do open-heart surgery only in McHenry.”

Larger size also allows a chain of hospitals to have more clout when negotiating for prices with insurance companies and suppliers, Milford noted.

“The provisions of health-care reform encourage consolidation among health-care providers, which is why news of hospital mergers is so prevalent right now,” Sherman’s Hudson adds. “The new standard for health-care providers is to deliver the best outcomes for the most people for the least amount of money.

“Like all systems across the country, Sherman is evaluating how we deliver our services in order to meet or exceed this standard and also remain viable,” Hudson said. “We could do so independently for a number of years before being in a position of need to consider partnership. But right now we are in a position of choice,” because the system’s income has been going up, expenses have been getting cut and the red ink is evaporating. So “we feel this is the right time to consider becoming part of something larger.”

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