by  JUDY HODGSON

THERE ARE TWO VERY DIFFERENT WAYS TO LOOK at the announcement Oct. 3 that the owners of St. Joseph Health System -- the Sisters of Orange in Orange County, Calif. -- are buying its chief competitor in Eureka, General Hospital. One view is that after more than 40 years of trying -- finally -- Eureka will have a united medical community and one hospital, eliminating wasteful duplication of expensive equipment and competing programs that exclaim -- "Have your baby here!" "Our emergency room is best!" Especially during this period of upheaval in the delivery of health care across the nation, this is good news for this community.

The other view, the darker view, is that the nonprofit Sisters of Orange -- which enjoys the privilege of paying no sales taxes when equipment is purchased, no property taxes on its buildings, and no federal payroll taxes -- had an unfair edge over the competition and has been acting more in its own self-interest, like a for-profit corporation, and less like a benevolent nonprofit.

It's a fact that in spite of its tax advantages, St. Joseph Health System has been losing money the last few years after a series of costly decisions. There was the rocky start, stop and restart of the expensive, and some physicians still say unnecessary, heart program. There was the purchase of Humboldt Home Health Services, which resulted in the layoff of the program's top nursing administrators and the shifting of program management out of Humboldt County to Sonoma County. And then there was the buy-out of many primary care physicians groups throughout the county where, quid pro quo, the doctors were heartily encouraged to send their business to St. Joseph Hospital and its affiliates instead of its competitors. When ownership of those physicians groups "did not meet revenue expectations," St. Joseph exercised its options to get out of those contracts. (Particularly galling was the purchase of the financially troubled Arcata Family Medical Group, a transaction that caused a documented drop in the usage of Mad River Community Hospital for a time. The five-physician group, AFMG, did not survive and held a farewell party last Saturday for its 11,000 patients.)

During this time of financial setbacks for St. Joseph, General Hospital, with its physician-friendly reputation, had been operating in the black and slowly gaining market share against its larger and better endowed rival. Against this backdrop, and a deadline of 2008 by the state for hospitals to seismically retrofit their buildings, St. Joseph quietly began negotiations with Province Healthcare of Tennessee, owners of General Hospital. The announcement of the purchase came two weeks ago and took the community by surprise. Since then Mike Purvis, St. Joseph chief executive officer, has been meeting with government and community leaders to reassure them that although this transition will be challenging and take time, this acquisition will be good for the community in the long run.

The following interview with the Journal was conducted Friday, Oct. 13. Purvis agreed to a follow-up interview in a month or so when the sale is complete and plans to combine programs, staff and facilities of the two hospitals are further developed.

Q. The Sisters of Orange made a decision -- which has huge impacts on health care on the North Coast -- to buy and close its competitor, a hospital that has been in operation since 1908, even before St. Joseph was in existence, without local input or prior notification -- not even the hospital's own local board of directors. Under the state's 501C3 nonprofit rules, that type of decision must be made by a vote of the nonprofit's board of directors. Technically -- clearly -- that's the board of the Sisters of Orange, not the local hospital board. When was that decision made? And what does that say about the authority of the St. Joseph Hospital Board of Directors if they are not consulted about a decision like this?

A. First of all, let's talk about this initiative, which is not an initiative to close the hospital. This is an initiative to take two facilities, both with strengths, and draw from those strengths to create a new organization in this community that has capabilities that extend beyond those that are currently available. That is the mission and the vision.

We don't intend to close the campus at General Hospital. ... It is true that due to the seismic requirements, it is more cost effective to retrofit and expand one campus than two, so the inpatient care eventually will move into one campus. Both campuses will continue to be used for health care, still be open, still be serving patients. From a standpoint from this initiative, let's be real clear that this is not about closing a hospital.

Q. But General Hospital will cease to exist?

A. General Hospital will exist as part of St. Joseph Health Systems Humboldt County.

In terms of the decision, yes, the St. Joseph Health Systems Board is the one that had to approve the definitive agreement. It's also true that in making that decision over a period several months, probably several years, they have gotten input frequently from our local (hospital) board in terms of attitudes about what's going on in this local market. At no time did we say, let's develop a strategy to buy General Hospital. ... I don't think it's fair to characterize this as a decision with no input. We have a lot of community members engaged in our hospital at the board level, committees of the board. ... Locally we had a board retreat several months ago. This item was not on the agenda. But in talking about strategies for Humboldt County, discussions developed spontaneously about how nice it would be to get the hospitals aligned in Eureka. I don't think it is fair to suggest that they were without any kind of input because their attitude was well known and I think they are very enthusiastic about it.

Q. When were you notified?

A. Soon after the dialogue between the two systems was initiated. I've known for several months that there were discussions underway that led to negotiations.

Q. There has been a long history of trying to get the two hospitals together. One early effort, in the 1960s when there were three hospitals in Eureka, including the county. The new hospital was to be a nonunion and nonreligious hospital. The Sisters eventually decided no. And I understand the Sisters considered selling to General Hospital twice during the period of in the mid-'80s to '90s when it was owned by Brim and Associates. Again, they decided against it. Why now and why did St. Joseph, a nonprofit, buy its competitor, a for-profit?

A. I can only speak to what the issues were here in the year 2000. ... One of the big (factors was the new state) extensive seismic requirements to bring the hospitals up to those standards. Both systems were looking at that. It was certainly an element that helped maintain parties in the dialogue. ... From St. Joseph Health System's standpoint this was a great opportunity not only to address the seismic issue, but to find a way -- to have a breakthrough on what was obviously talked about and considered many, many times over the last decades.

Q. The scenario is that General Hospital has been gaining market share in the last two years, has been profitable the last few years, at a time when 64 percent of the hospitals in California are operating in the red -- including St. Joseph. Also, St. Joseph has had a number of recent financial setbacks that have been costly. Was this the best thing for the this community to have the hospital operating in the red buy the hospital in the black?

A. First of all, St. Joseph Health System as a collective system is operating with a very nice operating margin, one that is able to sustain continued investment in growth and development and facilities and to fulfill our commitment in investing and improving the quality of life in the community. And St. Joseph Health System, Eureka, has the good fortune to benefit from that overall collective strength. The picture we are looking at overall is bigger than what's going on in Eureka. It is true that locally some initiatives were entered into, risks were taken, and -- armchair quarterback -- we can say maybe those weren't the best ones to take at the time. So we needed to change course on those. They were costly. But we've made huge progress on turning the corner. We're pretty well stabilized now.

Q. How much has the Heart Institute lost and how is it doing?

A. Since I've been here, the cardiovascular program has covered its (operating) costs. My understanding that there was ($1.7 million) raised to start up that program. So I don't think we've operated at a point where we've returned any start-up investment, but we have returned it from the standpoint that at this point in time there have been at least a couple hundred people that have received excellent care and stayed in the community. It's covering its direct costs and we are pleased that Dr. Postel continues to get himself better known and the activity keeps picking up.

Q. How about the amount of money lost in association with the buyout of the physicians practices?

A. In terms of the overall start to end, I don't have the numbers. Collectively in terms of operating losses, it's in the neighborhood of $2 milllion-$3 million. That's a pretty sizeable operating loss for an organization that size (and does not including the initial buyouts).

Q. Concerning the seismic-retrofit concerns, nearly everyone I spoke with said it is a factor, but not the primary reason for the buyout.

A. I think it is a major issue. We were prepared to seismically retrofit our building whether we did this transaction or not. Is it the only reason? The main reason? It was a significant reason. It was an issue both parties were facing. But ... to solve that problem and have the opportunity to align these resources and move to something that could be potentially better than what we had before -- that's a powerful reason as well.

Q. How do you respond to those who say the primary reason was St. Joseph, with its vastly superior financial resources, was acting more like a for-profit corporation, and, instead of competing by improving services, it simply bought its competitor.

A. I don't adhere to that line of thinking. ... Looking at the bigger picture, we see this as an opportunity to extend our not-for-profit health care ministry. St. Joseph is a leader in committing itself and disciplining itself to reinvest a certain percentage of ... income back into the community. We don't just invest in the community when we have some dollars to do it. It's a built-in discipline, an expectation. This (acquisition) is going to extend that not-for-profit ministry and service.

Candidly, not-for-profit hospitals have been merging. ... Buying for-profit hospitals is not unheard of. It's not the most common arrangement, but it's not that unique.

Q. What are the implications of the buyout, the positives?

A. We have started at St. Joseph some regional services that are doing well and could potentially be much stronger -- cancer care, neurosurgery, cardiovascular services. I think we need to look seriously in this region at an organized trauma-care plan. We want to continue to evolve and build those kinds of programs. Also working on the technology for minimally invasive procedures, exciting things being done now under angiography with stents, for instance.

Q. Prior to the sale, how do the hospitals compare?

A. I think General Hospital is a fine hospital. They have been doing a great job and that's why this is an exciting alignment. I think St. Joseph is an excellent hospital as well. We are a little larger, not dramatically larger, but with a little larger capacity, perhaps in our emergency room and a few specialized services. But General Hospital has its specialties as well -- neonatal II, its sleep studies.... They are both fine institutions.

Q. St. Joe's does not pay sales tax, property tax or federal payroll taxes. The city, county and state and feds will lose revenue. Is St. Joseph concerned with this loss of revenue for essential government-provided services?

A. It is true that the not-for-profits do not pay property taxes or sales tax on many items. But let's look at the bigger picture. I just had this conversation with the physicians a little bit ago. This past year, St. Joseph Hospital invested almost $250,000 in various community support entities, whether it be transportation, getting people to doctor's appointments or shelters, for victims of domestic violence, partnering with the county on programs. In addition to that, we've committed almost $2 million for care for the indigent. We've made a huge commitment. As we move forward it's going to increase that investment in the community. We expect that to far exceed any loss in property tax revenue.

Q. $2 million for indigents?

A. It's provided daily, weekly, monthly. I'm talking about individuals we know who don't have the ability to pay. We provide them care. Our system requests, and we are happy to provide, 1.5 percent of our operating income that we invest in caring for the poor, for patients who can't pay. We are held accountable for that. ... We can exceed that (1.5 percent), but we can't go lower than that.

Q. One doctor said the way to have good groceries, or a good cup of coffee, is to have competition. Why should it be different for health care?

A. I'm not sure it is. I'm not sure this move causes us not to have competition. We need to look beyond the boundaries of the community of Eureka, look to a larger region, look to the care going outside our area to other communities that are really not that more substantial in terms of size -- Medford, Ore., Redding, Calif. Certainly business goes to San Francisco and Sacramento. Much of that is at a level that we will never compete with, but much of it is. And are we giving these folks a choice to stay locally? We need to really challenge ourselves. What we'd like to do is not only to be competitive to provide services locally but to be competitive with those regional centers so we can provide the options. There are different levels of competition and I don't think this transaction removes us from a competitive environment. It may change the dimensions of the competition to some extent, but it still could be a competitive environment. We also have to compete for meeting the needs, expectations and service levels that we need to provide the patients and physicians.

Q. It is fair to assume that the power of the physicians in the community has been diminished by this sale? For better or worse, physicians have played one hospital against the other for years to get better equipment or whatever. How do you see the docs being involved and engaged in long-range planning for health care?

A. I see physicians being integral. We can't do long-range planning without physicians being involved. ... While their power in the health care delivery system has been diminished largely by the impact by insurance, ... they still remain the most influential factor in our health care delivery system. We can't do anything well unless we are listening to the physicians and responding to their needs.

St. Joe's Mission Statement:

"Why we exist: We are here to extend the
Catholic health care ministry
of the Sisters of St. Joseph
of Orange
by continually improving t
he health and quality of life
of people in the communities
we serve."

Q. Is the IPA (Independent Physicians Association) no longer very relevant?

A. I think the local IPA is serving a role and its relevance is determined not so much by the hospitals as by the payers and buyers of health care.

Q. One previous St. Joe administrator, Neil Martin, is reported to have said he wanted to bust the IPA.

A. It's possible. I don't know. Whatever his thinking was, it was not embraced by the board leadership of St. Joseph Health System Humboldt County or else he would still be here pushing that agenda.

Q. There are charges that St. Joseph has had unfair advantages all along in competing with General Hospital. Taxes is one of them, but because it is owned and operated as a ministry, it has been able to appeal directly for help to the community in a way that General and Mad River hospitals never could. The most obvious example is the $1.7 million that was raised for the Heart Institute. Was St. Joseph at a competitive advantage in your opinion and if so, why was it losing so much money during a period of time while General was profitable?

A. This debate rages in the hospital business, about who has the advantage -- for-profits or not-for-profits -- and I don't think anyone has answered the question yet. On the for-profit side, you have access to low-cost capital through equity. Go to the stock market and you don't have to answer to bond holders and others. So that's a huge advantage in the business since we are such a capital-intensive business.

Q. But St. Joseph did issue a huge bond ...

A. We had bonds, but we pay interest on bonds. You don't pay anything on stocks until you decide you want to pay a dividend. So it's low-cost capital. On the other side, you have the not-for-profit status and the for-profits point to that and say, that's a huge advantage. On the balance, I think, it comes out about equal. We want to be distinctive and do things that we strive to focus on, being an organization that's driven by values, making the community and the patient needs our priority and ... being stable and steady. The ownership of this hospital is going to be the same 10 years from now. That's an advantage.

Q. What was the purchase price of General?

A. The parties have agreed to keep that matter confidential. We can talk about that sometime in the future. (Editor's note: It will be a matter of public record in fourth quarter financial reports by Province, parent corporation of General.)

Q. In the newspaper business and others, when there are only two players in a market, they tend to pay substantially above market value. Was it in excess of fair market value?

There's more than two players. If you are looking at just Eureka, St. Joseph certainly serves a much broader market ... from Crescent City to Garberville.

Q. If you did pay substantially above market value, wouldn't that money have been better spent investing in expanding services?

A. I think that when you find all the facts are disclosed, you will find that isn't the case.

Q. Is it true that St. Joseph actually cares for fewer MediCal and poor at this time than either General or Mad River?

A. That is absolutely not true.

Q. What about the future of the Burre Center and the county's indigent population now handled by General?

A. It fits perfectly into our mission. We would have every expectation of continuing it. Obviously we have to see the contracts that create the obligations and responsibilities before we finalize things. ... Those are all the things we are dedicated to, especially the marginalized, those who are struggling to survive in our world.

Q. There are many in the community who are upset at the loss of reproductive rights services. One doctor said, "Reproductive rights is the law of the land. What if Islamics came into Humboldt County, bought up all the grocery stores -- the only grocery store -- and said, no pork?" Should the community at large be bound by the values of the Sisters?

A. I don't think ... St. Joseph Health System is trying to bind anyone into an ethical and religious belief. ... While we want to respect others, we also want to have respect. Let's talk about the real issues, ... in general terms, our extensive commitment to women's health, women's services and access to care. We have so many programs -- screening for breast cancer, cervical cancer, very important services for women, certainly supportive prenatal care, maternal care, shelters for women trying to escape situations of domestic violence. ... No we don't do everything, because there are a couple of things in the spectrum that are not fitting within those ethical and religious beliefs. Clearly one of those is abortion. ... The other one has to do with elective sterilization. ... There is a provision that if there's a personal health issue, a medical problem for which sterilization can be part of a treatment, then that falls within that particular directive. Those are guidelines. But let's take off the table all other reproductive services --control, family planning, all of those things. Those are all things that happen in clinic settings. The hospital's not part of delivering those services, so there's really no change or impact.

Q. So St. Joseph does allow such procedures as tubal ligation after delivery, but a woman has to sign a document?

A. The discussions about the care is between the physician and patient. When a physician comes on our staff they are provided with information about our policies and guidelines and they are asked to support those. There's no patient-by-patient monitoring. ... We do an annual review of these procedures.

Q. Isn't the physician required to put a note in a woman's chart as to a certain physical or mental conditions, saying that sterilization is medically necessary? Isn't that a fib?

A. I can't answer the question because I'm not a party to the conversation between the patient and her doctor. Annually we review how many are done and so forth. ... We have had, at one of our other hospitals, a case where ... a procedure did not appear to be medically needed (and there was a review of the hospital's policies and guidelines with the doctor.)

Q. You are new to this area -- the fourth CEO in two years. In fact the entire administration is new and many say as transient as any other large corporation (with the exception of spokeswoman Laurie Watson Stone and Sister Ann Warner). How is the community to be reassured that we will get the best health care now that there is one dominant provider in Eureka, as some say, a 900-pound gorilla?

A. That's an understandable concern. The thing that probably has allowed the St. Joseph Health System Humboldt County to continue to do as well as it has is the Sisters. They are the stabilizing force, they are long term. Personally, my record is that I like to stay and finish what I start. ... I like the opportunities, the challenges that exist here in Humboldt County. I like the lifestyle, the schools and fresh air and lack of traffic and a whole bunch of other things. I want to bring some stability to that situation and only time will tell.

I think the image of the 900-pound gorilla is not representative of my thinking. I want to demonstrate that we are beyond that, whether it was ever fair to have that label.

Q. What about the future of Mad River?

A. I think Mad River is a very unique hospital and I think they have done a very nice job in terms of establishing themselves in the Arcata community, unique in the sense that not a lot of hospitals have private ownership the way it does. And they have moved into a very nice position in that market. We would like to be friendly competitors to Mad River. We're here to serve the community. Mad River is here to serve the community. The two are separate and unique enough that we are probably better off trying to work together. I respect where they are at and I hope that they have great success.

Q. Where do you see St. Joe's 10 years from now and what is your area of service when you call it a regional medical center?

A. When I talk about a regional medical center, I'm not talking about every patient from 150 miles radius should come to this hospital. There's going to be hospitals like Mad River, Sutter Coast, Redwood Memorial, that serve a very important role, a very vital service. We are not going to try to duplicate those services in those communities.

When I talk regional medical center I mean, let's do everything we do well now and let's build more on to that. When we demonstrate over time that if you want cardiovascular care, your choices are to be inconvenienced to go out of the area or stay locally. Granted you have the choice now, but I think we need to build progress and trust in that product line. When one thinks of cancer care, we want them to think about services that are here locally. When one thinks about needing marrow surgery or some other type of sophisticated service, things that are probably not going to be available at Sutter Coast, Mad River, Redwood Memorial -- those are the type of services we want to be building and growing.

Q. Will St. Joseph honor all current contracts held by General, such as the agreement with the anesthesiologists?

A. Granted, when you are aligning two organizations -- I want to be real direct and honest on this, and it creates fear, but -- there is going to be change. I don't want to create the sense that everything is going to be the same forever, because that's false security.

But are we bound? Yeah, we'll take them on. Over time though we will be talking about how we can go through that process of change, (reviewing) what are the strengths, what are the weaknesses, and how can we blend these two organizations together. What we are not going to do is simply take the St. Joseph model and do away with the General one. We are going to look at both -- is one superior to the other? The same will be true with contract services.

The day we start we are going to have a hospital with patients coming and going. ... We will not have had time by the time this transaction closes, to make any change. It's not appropriate to try to change that quickly.

Q. Will St. Joseph have an edge negotiating with HMOs?

A. Will it give us more leverage? I don't know. Insurance companies are pretty powerful forces in the market.

Q. What happens next?

The steps, I understand, is that after due diligence there are a couple of government reviews at the state level, the Department of Health Services. At the federal level there is the filing with the FTC. The attorneys on all sides don't expect any issues, but ... you never know for sure.

Q. Anything else? (answered by Marketing Director Laurie Watson-Stone)

A. "Like the College of the Redwoods expansion of its career center that was announced in the paper the other day, we are looking at an investment of over $40 million into this community, retrofitting, expanding and refurbishing our facilities. It is a four-year process. It will generate significant jobs.

"This is an exciting time."

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