After a year after election, hospital lease deal looks solid [The Gazette (Colorado Springs, Colo.)]

Sept. 30--No new buildings have risen around Memorial Hospital's main campus off Boulder Street.

The number of patients coming through its doors this year mostly flat-lined. But a year after Denver-based University of Colorado Health signed a 40-year lease to operate Memorial Health Systems, hospital officials say they finally have a sense of stability.

"For the first time in a long time, we have a firm foundation on who we are and what we stand for," said Mike Scialdone, the hospital's chief executive.

Millions in lost revenue, three years of contentious meetings, a controversial $1 million golden parachute for a chief executive and a city election led the hospital to University of Colorado Health's takeover Oct. 1, 2012. Early returns on that lease by former Memorial task force members -- even those initially reluctant to approve the lease -- have been positive, even though the hospital has yet to make a profit.

It's early. The best assessment of the lease arrangement will take years.

The transition is evident only to patients, doctors and the hospital's financial staff tracking millions of dollars in new hires and capital improvements, hospital officials say.

As University of Colorado Health doles out millions to beef up the hospital system, most fundamental measures of this transition -- revenue and patient volume -- have yet to show marked improvement.

Save for a couple of subsets of the hospital's work -- such as its emergency room -- those two stat lines have been "pretty much flat," Scialdone said.

The static revenue is "definitely a concern," said Bruce Schroffel, University of Colorado Health's retiring chief executive. It's also a trend for Memorial Health System.

The hospital system, which includes two hospitals, Memorial Hospital Central and Memorial Hospital North, lost $32.8 million in 2008 as the recession raged. Lagging admissions and a stock market crash caused the hospital to lose $10.1 million in 2011 -- leaving the prospect of the system defaulting on its bond obligations.

Further, an initial $250 million price tag for pension buyouts nearly shelved plans by the Colorado Springs City Council to cede city control in 2011.

"We still have a ways to go," Scialdone said. "And the turnaround in those areas has been slower than anticipated. But I think if you focus on the right things, which is building that culture, ensuring a quality safe environment for people to come to, I think the numbers eventually follow."

University of Colorado Health opened its checkbook to ensure those outcomes begin tracking higher.

In the first nine months of the deal, University of Colorado Health poured $37 million into capital improvements at Memorial Health System, said Brian Newsome, a Memorial Hospital spokesman.

Most of that money was spent for cyberspace upgrades -- the hospital's new $40.1 million electronic records system is expected to go live Nov. 2.

The hospital also added about 35 doctors to its payroll, in large part by acquiring two Colorado Springs-based cardiology practices. By bringing in Pikes Peak Cardiology and Heart Center of Colorado, the hospital system added 16 cardiologists, Newsome said.

It's part of $90 million that University of Colorado Health plans to spend in the first three years of its 40-year lease.

The agreement called for university officials to spend at least $28 million a year on capital improvements, along with $3 million on a medical branch at the University of Colorado at Colorado Springs.

Some early critics of the deal have changed their minds.

"By in large, the community is better served," said Tim Leigh, a former councilman, who voted for university's lease despite initial misgivings. " . I personally couldn't be more pleased."

Councilwoman Jan Martin, who headed the task force, agreed.

"There was just sort of a cloud hanging over the hospital over what the future looks like," Martin said.

A linchpin for the council's support -- a medical branch office at the University of Colorado at Colorado Springs -- remains in the works. The University of Colorado School of Medicine will accept 24 extra students in fall 2014 to study at its Aurora campus. They will begin using a leased branch office in Colorado Springs -- and conducting clinical rotations at Memorial Hospital -- in 2016, said Mark Couch, University of Colorado School of Medicine spokesman.

The hospital also remains up to three years from upgrading to a Level I trauma center, the highest designation available by the Colorado Department of Health and Environment.

Memorial's upgrades have sparked competition.

A month after officials announced the bid for the trauma center, Penrose- St. Francis officials followed suit. Penrose-St. Francis has begun its own two-year, $40 million capital improvement plan.

When two orthopedic doctors left Penrose-St. Francis in the last year to join Memorial Hospital, the Penrose-St. Francis hired three replacements, said Margaret Sabin, Penrose-St. Francis' chief executive.

One of those doctors that switched to Memorial, Dr. Matthew Blum, said the academic aspect the lease drew him to the hospital -- a switch he never considered while Memorial's ownership remained uncertain.

"If university had not picked up Memorial, I think Memorial was really headed for trouble," Blum said. "When things are that rocky . it's pretty difficult to say 'Gee, I want to be part of a system that's hard to see a future in.'?"

The effect of that reignited competition on health care prices remains to be seen.

A growing body of research suggests hospital mergers in the same market area can increase health care costs, said Leemore Dafny, a professor at Northwestern University specializing in health care system consolidation.

But few studies have focused on the effect of hospital mergers between two systems in different markets, as was the case when Denver-based University of Colorado Health leased Memorial Hospital Systems. One recent study found that such hospital mergers can allow the new, bigger hospital system to gain more leverage in negotiations with insurance companies.

The prices that insurance companies paid to those expanding hospital systems rose 10 to 20 percent just one to two years after the merger, said Matthew Lewis, an associate professor at Clemson University, who spearheaded the research alongside an Alabama University professor.

There are lingering concerns over the lease deal.

A lawsuit regarding employee pension accounts with the Colorado Public Employees' Retirement Association, or PERA, is unresolved. PERA initially demanded nearly $250 million for the city to buy out pension plans for Memorial employees. The city says it owes nothing.

University of Colorado Health has placed $185 million in an escrow account to cover settlements from the lawsuits -- a payment made as part of the original lease agreement.

Schroffel said the university is focusing on a new five-year strategy, one that could include more capital investment in Memorial Health System.

"It takes time to build programs," Schroffel said. "That's what we're doing now."

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EDITOR'S NOTE: This story has been changed to state correct details of incoming University of Colorado School of Medicine students, including the location of their first two years of study and the school's branch office in Colorado Springs. It also corrects the field of study for two doctors who left Penrose-St. Francis Health System, and the three doctors who replaced them.

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