Bon Secours Baltimore Health Corp. said yesterday that it...

June 01, 1996|By Timothy J. Mullaney | Timothy J. Mullaney,SUN STAFF

Bon Secours Baltimore Health Corp. said yesterday that it will take over Liberty Health System, creating a larger institution officials say will compete better for business from health maintenance organizations.

Making themselves attractive to HMOs is increasingly important because both West Baltimore institutions will be heavily affected by coming changes in the state's Medicaid program.

Maryland health officials are preparing a plan to shift 210,000 Medicaid patients into managed care by July 1997. They are also raising the percentage of Medicaid money that must be spent on direct patient care, making it more urgent to cut administrative costs.

"Absolutely. [The state's Medicaid plan] is certainly part of the boards' [of directors] assessment," said Jane Durney Crowley, chief executive of Bon Secours Baltimore.

Liberty gets 21 percent of its hospital revenue from Medicaid patients and Bon Secours gets 15 percent, both well above the 12 percent average at Maryland's 50 hospitals, according to the state Health Services Cost Review Commission.

The merger could be followed by other deals between smaller hospital systems pressured by changing Medicaid rules, said Barbara Shipnuck, deputy secretary for health care policy, finance and regulation at the state Department of Health and Mental Hygiene. "They can't cut the amount they spend on care," Shipnuck said. The place to cut will be administration, she said, and that will mean more mergers. "For the providers, clearly they hope to achieve economies of scale."

The push to cut administration crunches hardest on small hospitals such as Bon Secours and Liberty, which are the fifth and eighth most expensive hospitals in Maryland even after factoring out costs stemming from their urban location and relatively poor patient base.

Both hospitals have had run-ins with the health services cost review commission over their relatively high rates.

"Some of it is legitimate issues that we can't adjust for," cost review commission Executive Director Robert B. Murray said. "It also reflects some level of inefficiency that they haven't corrected."

Officials of both institutions announced the merger at the offices of the Baltimore Development Corp., the city's economic development agency. The focus there was less on economics than on the two institutions' shared mission of providing access to people of all incomes.

"We have much more than geography in common," said Arnold Williams, chairman of Liberty's board of directors.

Terms of the deal were not disclosed; a Bon Secours spokesman would say only that the hospital is making a donation to the nonprofit foundation that runs Liberty as part of the takeover. The merger is expected to be complete within three months.

The new system will have 2,100 employees, 490 hospital beds, nine primary care facilities, and more than 600 physicians. It will be the largest integrated care system in West Baltimore, a market that the University of Maryland Medical System also has targeted.

Liberty Chief Executive Everard O. Rutledge will be president of the merged institution, with Bon Secours CEO Crowley as executive vice president. Bon Secours Baltimore board Chairman William J. Gorman will be chairman of the new system, with Liberty's Williams as vice chairman.

The combined system will be part of Marriottsville-based Bon Secours Health System, which runs 21 hospitals and long-term care facilities nationwide. The nonprofit parent company has 13,000 employees and annual revenues of about $1 billion.

Officials would not discuss cost-cutting plans in detail, but said most initial savings in administration and job cuts will come from attrition and reassignments more than firings.

"Back office is the first target," Crowley said. "The biggest target is not clinical services. It's administrative services that don't add value for the patient. We also have much greater purchasing power."

But the merger will not let the combined system offer lower hospital rates to HMOs immediately. Because the state controls Maryland hospital rates, the merged institutions cannot change rates until the state approves, said Marty Roach, executive director of the Maryland Association of HMOs.

She said the merger will be likely to cut costs faster for nonhospital services such as primary care because are not part of the hospital cost regulation system.

The two systems have been discussing the merger for at least six months, officials said. Last September, they announced they would form a joint venture to compete for managed-care contracts. But anti-trust laws soon led them to consider a full-fledged merger.

"As long as you're separate, you can't plan pricing strategy together; it's illegal," Crowley said. Under an alliance, she said, the hospitals could not coordinate which would specialize in which forms of care, a strategy that helps hospitals cut costs by eliminating duplication.

Hospital officials would not say which specialties are likely to be concentrated at either Liberty or Bon Secours. The two hospitals are linked by a shuttle service, so patients who live near one hospital but don't own a car will be able to get to the other if they need to.

Pub Date: 6/01/96

zTCHD: Bon Secours to take over Liberty group; Merger is intended to make institutions attractive to HMOs; Lower costs, rates expected; Changes in state rules for Medicaid play role in decision to join

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