631
CASE
Riverview
11
Regional Medical
Center: An HMA
Facility
Matt Hayes, executive director of Riverview Regional Medical
Center (RRMC), reviewed the performance indicators for the 2004
fiscal year (see Exhibit 11/1). As he studied the numbers, he mentally reviewed key events and decisions over the past year that had
contributed to some of the more dramatic changes in the annual
profile. And, he considered what new challenges might confront him
now that his chief competitor, Gadsden Regional Medical Center
(GRMC), had a new executive director who would almost certainly
attempt to alter the status quo in the local hospital market.
Health Care Providers
In 1993, Merrill Lynch predicted: “In the larger urban areas, HMOs
would . . . continue to be the coordinator and provider of health care
services. However, in nonurban markets, the hospital would be the
This case was written by Woodrow D. Richardson, Ball State University, and Donna
J. Slovensky, The University of Alabama at Birmingham. It is intended to be used
as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Used with permission of Woody
Richardson and Donna Slovensky.
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CASE 11: RIVERVIEW REGIONAL MEDICAL CENTER
Exhibit 11/1: RRMC Key Volume Indicators, FY 2002–FY 2004
Indicator
Open Heart
Cardiac Catheterization
Coronary Stents
Inpatient Endoscopy
Outpatient Endoscopy
Inpatient Surgery
Outpatient Surgery
Inpatient CT Scans
Outpatient CT Scans
Inpatient MRI
Outpatient MRI
Outpatient Visits
Births
Inpatient Admissions
Inpatient Admissions Via ER
ER Visits
Medicare Discharges
Medicare ALOS
Medicare Case Mix Index
FY 2002
FY 2003
FY 2004
324
7,661
942
1,300
2,354
2,922
3,047
4,685
6,087
826
2,915
61,865
887
10,530
5,527
25,452
5,736
6.28
1.53
330
9,704
1,420
1,360
2,263
2,873
2,806
4,309
5,753
805
2,534
55,340
433
9,710
5,253
24,764
5,646
6.33
1.62
199
6,548
795
1,227
2,283
2,068
3,301
4,099
6,440
1,165
2,434
51,736
0
8,482
5,011
24,347
5,308
6.2
1.46
cornerstone and coordinator of health care services for the health alliance purchasing
cooperatives which would be formed under managed competition proposals.”
At the individual provider level, some experts insisted that the financial power
base was moving away from solo practices and independent small groups toward
integrated, cost-competitive, comprehensive systems that produced a single patient
bill including the charges of the physicians, the hospital, and the outpatient
services. Integrated systems required a corporate structure to facilitate sharing
of capitated risk. Throughout the 1990s, mergers and other types of strategic
alliances between physicians’ practices, and between hospitals and physicians’
practices, had increased in an effort to reduce costs and become price competitive. Small group practices often lacked the administrative and management
expertise as well as the material resources necessary to improve efficiency. They
were advised to look for such capabilities when they sought potential partners.
Many physicians remained skeptical of mergers, partnerships, or alliances offering any competitive advantage. That skepticism occurred most often in areas
where managed care was absent or limited. Exhibit 11/2 shows the penetration
of managed care in selected southern states.
Rural and Nonurban Health Care Market
Forty-nine percent of the United States population resided in counties classified as
rural or nonurban. Nonurban areas had 44 percent fewer doctors per 100,000 residents than urban-designated areas. Since 1981, more than 200 nonurban hospitals
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633
Exhibit 11/2: HMO Penetration in Selected States
State
Alabama
Florida
Georgia
Texas
California (reference point)
Percentage
3.8
26.0
13.4
12.8
48.5
Source: InterStudy Staff, The InterStudy Competitive Edge, Part II: Managed Care Industry
Report (St. Paul, MN: InterStudy, 2003). Data abstracted from: http://www.medicarehmo.com/
mcmnu.htm, accessed September 20, 2004.
had closed. Many hospitals continued to underperform and were failing because
of ineffective operations.1
Rural and nonurban hospitals had become hot acquisition targets for investorowned health care companies. For the nation’s 2,400 rural hospitals – acute care
facilities located outside of a metropolitan statistical area – the status quo was not
acceptable.2 Hospitals that chose to remain independent faced an uncertain environment where 60 percent to 75 percent of revenues were attributed to Medicare.
Threatened by the prospect of declining federal reimbursement coupled with the
lack of resources to invest in costly information systems, many local governments
that owned rural and nonurban hospitals were looking for a way out.3
When it came to the inverted “field of dreams” logic used by small hospitals in
the past, no other firm had been as successful as Health Management Associates,
Inc., according to chairman of the board, William Schoen. “Whereas other hospitals [think], ‘We are here and you will come,’ we’re in the customer service
business,” Schoen said.
Health Management Associates (HMA)
HMA was ahead of the growing throng of firms targeting rural and nonurban
markets where the presence of managed care was less intense and where physicians perceived good opportunities. HMA generally employed a decentralized
approach; operations were left to the executive directors of each hospital. Only
financial controls were centralized. Founded in 1977, HMA acquired, improved,
and operated hospitals in high-growth, nonurban areas in the Southeast and
Southwest, where the growing population created a need for comprehensive
health care services. HMA sought to turn around nonurban hospitals in growing
communities with populations of 30,000 to 400,000 with a clear demographic
need. The company looked for states with certificate of need (CON) regulations
and an established physician base. Using a proven acquisition and management
strategy, HMA consistently turned hospitals into efficient, state-of-the-art medical facilities that provided high-quality care. From 1991 to 2004, HMA acquired
38 hospitals, bringing its total count to 53 hospitals in 16 states. William Schoen,
HMA chairman of the board, and Joseph Vumbacco, president and CEO, saw no
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CASE 11: RIVERVIEW REGIONAL MEDICAL CENTER
shortage of acquisition prospects. Cost pressures coupled with inadequate coping
resources would continue to affect many community hospitals adversely.
In 2003, HMA had a net income of $283.4 million on net patient service
revenues of $2.56 billion. The company showed consistent growth from 1999,
when net income was $150 million and revenues were $1.36 billion. Admissions
rose 8.9 percent to more than 235,000 in 2003. Patient days and emergency room
visits grew in 2003 to 1.1 million and to 914,000 respectively. Revenues of
hospitals operated for at least 12 months grew by 7.9 percent over the year ended
in 2003. Admissions for these hospitals were up 2.9 percent, and ER visits were
up by 5.1 percent. Correspondingly, the hospitals’ occupancy levels grew to
47.7 percent in 2003 versus 47.1 percent in 2002.
HMA had a small corporate overhead. The company employed about 100
people in its Naples, Florida, corporate office. Exhibit 11/3 provides information
on the corporate officers’ backgrounds.
Exhibit 11/3: HMA Board of Directors’ Background Information
Name
Position
William J. Schoen
Chairman of the Board, Health Management
Associates, Inc.
President, Keystone Capital, Inc.
Senior Managing Director, Cornerstone Equity
Investors, LLC
Director Emeritus, KPMG Peat Marwick LLP (retired)
President and Chairman of the Board of
Governors (retired), Mayo Clinic
Dean, Marshall School of Business, University
of Southern California
President and Chief Executive Officer, Health
Management Associates, Inc.
Senior Executive Vice President and Chief Financial
Officer (retired), SBC Communications, Inc.
Chairman Emeritus of Pfizer, Inc.
Kent P. Dauten
Robert A. Knox
Charles R. Lees
William E. Mayberry, MD
Randolph W.
Westerfield, PhD
Joseph V. Vumbacco
Donald E. Kiernan
William C. Steere, Jr.
Year Elected
1983
1981
1985
1988
1991
1982
1985
1982
1983
William J. Schoen served as Chairman of the Board since April 1986. He was first elected a director in
February 1983, became President and Chief Operating Officer in December 1983, Co-Chief Executive
Officer in December 1985, and Chief Executive Officer in April 1986. He served as President until
April 1997 and Chief Executive Officer until January 2001. From 1982 to 1987, Mr. Schoen was
Chairman of Commerce National Bank, Naples, Florida, and from 1973 to 1981 he was President,
Chief Operating Officer, and Chief Executive Officer of The F&M Schaefer Corporation, a consumer
products company. From 1971 to 1973, Mr. Schoen was President of the Pierce Glass subsidiary of
Indian Head, Inc., a diversified company.
Kent P. Dauten served as a Director from March 1981 through May 1983, and from June 1985 through
September 1988. He was again elected a Director in November 1988. Since February 1994, Mr. Dauten
has been President of Keystone Capital, Inc., a private investment advisory firm he founded.
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635
Exhibit 11/3: (cont’d)
Mr. Dauten was formerly a Senior Vice President of Madison Dearborn Partners, Inc., a private
equity investment firm, and of First Chicago Investment Corporation and First Capital Corporation of
Chicago, the venture capital subsidiaries of First Chicago Corporation, where he had been employed in
various investment management positions since 1979.
Robert A. Knox became Senior Managing Director of Cornerstone Equity Investors, LLC, an investment advisory firm, in December 1996. From 1994 until December 1996, he was Chairman and
Chief Executive Officer, and from 1984 to 1994 he was President, of Prudential Equity Investors, Inc.,
an investment capital firm. Prior to that, Mr. Knox was an investment executive of The Prudential
Insurance Company of America. He served on HMA’s Board of Directors since 1985.
Charles R. Lees was elected a Director in February 1989. Mr. Lees has been in the private practice
of law, concentrating in tax matters, since May 1985. He was a Project Director for the Governor’s
Tax Reform Advisory Commission in California from August 1984 to September 1985. From 1979
to 1983 he was a visiting professor at the School of Accounting, University of Southern California.
For more than 20 years prior to his retirement in 1979, Mr. Lees was a partner in the accounting
firm of Peat, Marwick, Mitchell & Co., specializing in tax matters.
William E. Mayberry, MD was the retired President and Chief Executive Officer of the Mayo
Foundation and the retired Chairman of the Board of Governors of the Mayo Clinic, Rochester,
Minnesota, where he had been employed in various capacities from 1956 until his retirement
in 1992.
Randolph W. Westerfield, PhD served as Dean, the Marshall School of Business, University of
Southern California, Los Angeles, California, since 1993. For the previous 20 years he was a member of the finance faculty at the Wharton School of Business at the University of Pennsylvania.
In addition, Dr. Westerfield served on the Board of Directors of William Lyon Homes and Nicolas
Applegate Growth Equity Fund.
Joseph V. Vumbacco became Chief Executive Officer of the company in January 2001. Prior to that,
and since April 1997, he was the Company’s President, as well as serving as Chief Administrative
Officer and Chief Operating Officer. He joined the company as an Executive Vice President in January
1996 after 14 years with The Turner Corporation (construction and real estate), most recently as an
Executive Vice President. Prior to joining Turner, he served as the Senior Vice President and General
Counsel for The F&M Schaefer Corporation, and previously was an attorney with the Manhattan
law firm of Mudge, Rose, Guthrie & Alexander.
Donald E. Kiernan was the retired Senior Executive Vice President and Chief Financial Officer of
SBC Communications Inc. (telecommunications), a position he held from October 1993 to August
2001. Prior to that, and since 1990, he served as Vice President of Finance for SBC Communications Inc. Mr. Kiernan was a Certified Public Accountant and former partner with Arthur Young &
Company. Mr. Kiernan served on the Boards of Directors of Horace Mann Educators Corporation,
LaBranche & Co Inc., Seagate Technology, and Viad Corp.
William C. Steere served as a director of the company since May 2003. He was the Chairman Emeritus
of Pfizer Inc. since July 2001, a Director since 1987, and was Chairman of the Board from 1992 to
April 2001 and Chief Executive Officer from February 1991 to December 2000. Mr. Steere served
on the Board of Directors of Dow Jones & Company, Inc., MetLife, Inc., the New York University
Medical Center, and The New York Botanical Garden, as well as on the Board of Overseers of
Memorial Sloan-Kettering Cancer Center.
Source: Company documents.
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CASE 11: RIVERVIEW REGIONAL MEDICAL CENTER
Corporate Philosophy and Mission
HMA’s Statement of Corporate Philosophy defined its goals and principles as a
health care provider, employer, and publicly traded company. A cornerstone of
HMA’s philosophy was the conviction that all employees, at every hospital and
at the corporate office, shared a common objective of providing quality service
to the many different customers of its business. HMA’s guiding objectives were
as follows:
• To provide the highest quality of service to our patients, physicians, and the
communities we serve.
• To provide employees with a satisfying and rewarding work environment.
• To provide an attractive return on investment to those who are investors in
the Company.
• To function as a good corporate citizen in the communities we serve.
• To manage HMA in a manner that maintains uniform strength and identity
while allowing individual hospitals the degree of independence necessary
to maximize innovation and efficiency and meet the individual needs of the
communities they serve.
Corporate Strategy
When originally established in 1977, HMA intended to compete as a national
firm owning, leasing, and managing hospitals throughout the United States. In
1983, HMA redirected its focus to a niche of hospitals located in nonurban communities in the Southeast and Southwest with 30,000 to 400,000 in population.
The officers believed the very nature and size of the facilities (generally 200
beds or fewer) located in nonurban communities precluded the individual,
non-system-affiliated hospitals from attracting experienced and professional
medical practitioners in each area of specialty. On the other hand, they believed
that through system affiliation with HMA and its concomitant infusion of
capital and management expertise, the same financially troubled hospitals could
become profitable.
To penetrate the niche markets, HMA executives believed it was necessary
to provide management expertise and medical technology in specific areas to
reduce costs, attract physicians, and increase the scope and quality of service –
all within a profitable framework that would halt the out-migration of patients
to larger metropolitan areas for as many surgical procedures as possible. They
believed that achieving these objectives allowed the communities HMA served to
forge the viable and effective health care delivery facilities that they desperately
needed.
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H E A LT H M A N A G E M E N T A S S O C I AT E S ( H M A )
637
Facilities
In August 2004, HMA operated 53 facilities (see Exhibit 11/4) consisting of just
under 7,000 beds. HMA hospitals offered a broad range of inpatient and outpatient health services with an emphasis on primary care. Inpatient programs at all
facilities included a wide variety of medical and surgical services, diagnostic
Exhibit 11/4: HMA Facilities in 2004
Licensed
Beds
Location
Hospital
Facility Type
Alabama
Anniston
Gadsden
Stringfellow Memorial Hospital
Riverview Regional Medical Center
General Medical/Surgical
General Medical/Surgical
125
281
Arkansas
Little Rock
Van Buren
Southwest Regional Medical Center
Crawford Memorial
General Medical/Surgical
General Medical/Surgical
125
103
Florida
Brooksville
Crystal River
Dade City
Greater Haines
City
Key West
Lehigh Acres
Marathon
Milton
Orlando
Punta Gorda
Sebastian
Sebring
Spring Hill
Tequesta
Brooksville Regional Hospital
Seven Rivers Regional Medical Center
Pasco Regional Medical Center
Heart of Florida Regional Medical
Center
Lower Keys Medical Center
Lehigh Regional Medical Center
Fishermen’s Hospital
Santa Rosa Medical Center
University Behavioral Center
Charlotte Regional Medical Center
Sebastian River Medical Center
Highlands Regional Medical Center
Spring Hill Regional Hospital
Sandy Pines
General
General
General
General
Medical/Surgical
Medical/Surgical
Medical/Surgical
Medical/Surgical
91
128
120
115
General Medical/Surgical
General Medical/Surgical
General Medical/Surgical
General Medical/Surgical
Psychiatric
General Medical/Surgical
General Medical/Surgical
General Medical/Surgical
General Medical/Surgical
Psychiatric
167
88
58
129
80
156
52
129
126
75
Georgia
Monroe
Statesboro
Walton Regional Medical Center
East Georgia Regional Medical Center
General Medical/Surgical
General Medical/Surgical
135
150
Kentucky
Paintsville
Paul B. Hall Regional Medical Center
General Medical/Surgical
72
Biloxi Regional Medical Center
Rankin Medical Center
Madison Regional Medical Center
Northwest Mississippi Regional
Medical Center
General
General
General
General
Mississippi
Biloxi
Brandon
Canton
Clarksdale
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Medical/Surgical
Medical/Surgical
Medical/Surgical
Medical/Surgical
153
134
67
195
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CASE 11: RIVERVIEW REGIONAL MEDICAL CENTER
Exhibit 11/4: (cont’d)
Location
Licensed
Beds
Hospital
Facility Type
River Oaks Hospital
Women’s Hospital at River Oaks
Central Mississippi Medical Center
Riley Hospital
Natchez Community Hospital
General
General
General
General
General
Medical/Surgical
Medical/Surgical
Medical/Surgical
Medical/Surgical
Medical/Surgical
110
111
473
180
101
Twin Rivers Regional Medical Center
Poplar Bluff Regional Medical
Center – North and South
General Medical/Surgical
General Medical/Surgical
116
423
North Carolina
Hamlet
Louisburg
Mooresville
Statesville
Sandhills Regional Medical Center
Franklin Regional Medical Center
Lake Norman Regional Medical Center
Davis Regional Medical Center
General
General
General
General
Medical/Surgical
Medical/Surgical
Medical/Surgical
Medical/Surgical
64
85
105
149
Oklahoma
Durant
Midwest City
Medical Center of Southeastern Oklahoma General Medical/Surgical
Midwest City Regional Medical Center
General Medical/Surgical
120
247
Pennsylvania
Carlisle
Lancaster
Lancaster
Carlisle Regional Medical Center
Community Hospital of Lancaster
Lancaster Regional Medical Center
General Medical/Surgical
General Medical/Surgical
General Medical/Surgical
200
154
261
South Carolina
Gaffney
Hartsville
Upstate Carolina Medical Center
Carolina Pines Regional Medical Center
General Medical/Surgical
General Medical/Surgical
125
116
Tennessee
Jamestown
Lebanon
Tullahoma
Jamestown Regional Medical Center
University Medical Center
Harton Regional Medical Center
General Medical/Surgical
General Medical/Surgical
General Medical/Surgical
85
257
137
Texas
Mesquite
Mesquite
Medical Center of Mesquite
Mesquite Community Hospital
General Medical/Surgical
General Medical/Surgical
176
172
Virginia
Pennington Gap Lee Regional Medical Center
General Medical/Surgical
80
Washington
Yakima
Toppenish
Yakima Regional Medical & Heart Center
Toppenish Community Hospital
General Medical/Surgical
General Medical/Surgical
226
63
West Virginia
Williamson
Williamson Memorial Hospital
General Medical/Surgical
76
Jackson
Jackson
Jackson
Meridian
Natchez
Missouri
Kennett
Poplar Bluff
Source: Company documents.
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639
services, intensive and cardiac care, plus emergency services that were staffed
by physicians at all times. At various facilities, other specialty services, such
as full-service obstetrics, oncology, and industrial medicine, were available.
In addition, HMA operated two free-standing psychiatric hospitals.
Selected Financial Data and Operating Statistics
In 2004, HMA had a net income of $325 million on net patient service revenues
of $3.2 billion and had shown consistent growth from 1999, when net income
was $150 million and revenues were $1.36 billion. Total admissions rose 20.9
percent over fiscal year 2004, reflecting the admission contributions from hospitals
acquired during the year. Patient days grew to 1.28 million in fiscal year 2004.
Net patient revenues of hospitals that operated for at least 12 months increased
by 3.7 percent during the fourth quarter of fiscal year 2004. Exhibit 11/5 shows
the income statement and balance sheet for HMA.
Exhibit 11/5: Health Management Associates, Inc. Consolidated Statements of Income
and Balance Sheets (in $ thousands, except per share data)
Years ended September 30
Net Patient Service Revenue
Costs and Expenses
Salaries and Benefits
Supplies
Provision for Doubtful Accounts
Depreciation and Amortization
Rent Expense
Interest, Net
Write-off of Deferred Financing Costs
Noncash Charge for Retirement Benefits
and Write-Down of Assets Held for Sale
Total Costs and Expenses
Income Before Minority Interests
and Income Taxes
Minority Interests in Earnings of
Consolidated Entities
Income Before Income Taxes
Provision for Income Taxes
Net Income
Net Income per Share
Basic
Diluted
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2001
2002
2003
2004
1,879,801
2,262,601
2,560,576
3,205,885
710,535
535,926
143,923
90,646
40,850
19,970
—
874,729
650,852
172,430
95,328
47,048
15,543
—
989,075
741,487
186,826
109,864
50,401
14,915
4,931
1,259,859
956,891
240,074
134,915
65,766
16,184
—
17,000
1,558,850
—
1,855,930
—
2,097,499
—
2,673,689
320,951
406,671
463,077
532,196
—
320,951
125,973
194,978
1,009
405,662
159,226
246,436
4,341
458,736
175,312
283,424
5,716
526,480
201,381
325,099
0.80
0.76
1.02
0.97
1.19
1.13
1.34
1.32
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CASE 11: RIVERVIEW REGIONAL MEDICAL CENTER
Exhibit 11/5: (cont’d )
Assets
Total Current Assets
Net Property, Plant, and Equipment
Funds Held By Trustee
Excess of Cost Over Acquired Net Assets, Net
Deferred Charges and Other Assets
2002
2003
2004
695,786
1,281,782
1,450
342,113
43,186
2,364,317
1,093,336
1,427,715
15,924
397,825
75,726
3,010,526
941,594
1,692,701
55,942
748,156
68,895
3,507,288
273,743
17,861
42,793
650,159
33,009
267,613
80,023
63,752
924,713
37,350
320,131
143,760
96,803
925,518
43,066
2,611
373,214
1,271,583
1,647,408
2,627
399,782
1,535,322
1,937,731
2,660
445,270
1,830,736
2,278,666
(300,656)
1,346,752
2,364,317
(300,656)
1,637,075
3,010,526
(300,656)
1,978,010
3,507,288
Liabilities and Stockholders’ Equity
Total Current Liabilities
Deferred Income Taxes
Other Long-Term Liabilities
Long-Term Debt
Minority Interests in Consolidated Entities
Stockholders’ Equity
Preferred Stock
Additional Paid-in-Capital
Retained Earnings
Less: Treasury Stock, 22,500 Shares at Both
September 30, 2003 and 2002, Respectively
Total Stockholders’ Equity
Source: Health Management Associates, Inc. 2004 Annual Report.
Riverview Regional Medical Center
The 281-bed acute care facility was originally chartered as The Holy Name of
Jesus Hospital, and was the first hospital built in Etowah County back in the early
1930s. Owned and operated by an order of Catholic nuns, it remained under their
ownership and control until financial considerations persuaded them to sell the
hospital to HMA in August 1991. At that time the name changed to Riverview
Regional Medical Center. RRMC’s mission statement was as follows:
Riverview Regional Medical Center will provide services to the best of our ability,
treating everyone with dignity and respect in a safe manner.
Local Demographics
RRMC was located in the city of Gadsden, Etowah County, in northeastern Alabama.
Exhibit 11/6 shows the relationship and proximity of the cities of Etowah County
as well as the county seat. Etowah County comprised 12 incorporated cities with a
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RIVERVIEW REGIONAL MEDICAL CENTER
641
Exhibit 11/6: Relationship and Proximity of Cities in Etowah County
Chattanooga, TN
(95 mi)
Huntsville
(70 mi)
11
Sardis City
59
Mountainboro
179
431
Ridgeville…
