Question: To seek shelter from the competitive storm, Marcus Welby Hospital (MWH) is considering forming a joint venture with an existing for-profit HMO. MWH would be given 30 percent ownership of the privately held HMO, and each of its five board of trustees members would be given 1 percent ownership, in exchange for MWH contributing $10 million in capital funds, which is 35 percent of the HMO's appraised net worth. Since the HMO already owns its own nursing home, MWH will raise the capital by selling its nursing home. MWH will receive 30 percent of whatever profit distributions the HMO board chooses to make from time to time and the trustees will receive their 1 percent shares. MWH also hopes to increase its patient base for hospital admissions and to secure a better bargaining position for reimbursements from the HMO, but the HMO is making no promises about where its subscribers will be sent for hospital care, nor how it will pay MWH for hospital services to its subscribers.

Marcus Welby Hospital (MWH) is a private, nonprofit 400-bed facility employing more than 2,000 workers, with more than $100 million in annual revenues. It is located on the outskirts of a metropolitan area of one million people that contains three other major tertiary care hospitals of 300 beds or more and four smaller, community hospitals of 100 to 150 beds. Currently, 38 percent of MWH's gross revenues are from Medicare, 12 percent are from Medicaid, and 40 percent from private insurance or out-of-pocket payments. The remaining 10 percent is bad debt or charity care.

Marcus Welby Hospital was born in the 1950s as a small community hospital. It began as an effort by persons from the local church and medical communities joining forces with local business leaders to provide convenient hospital care in the growing suburbs. When the federal Hill-Burton program created a reservoir of construction loan money in the 1950s, the group of town boosters chose to apply for a construction loan to build a 100-bed facility. Its affiliation with the religious denomination has never been formalized through ownership, and the church no longer provides any significant financial support. Nevertheless, the charitable role of the hospital is taken seriously by the board of directors, which always includes one or two members of the denomination.

In the latter 1960s, increased revenues through the Medicare program enabled the hospital to obtain further construction loans, and the hospital expanded to add 100 more beds and more sophisticated inpatient services. Another wave of change swept through the health care industry in the 1980s, in response to a fundamental alteration in the way Medicare pays hospitals. Some hospitals consolidated, whereas Marcus Welby sought to diversify operations and increase its patient base by providing a wider range of services and much larger bed capacity. Using a bond issue financed through the state, the hospital doubled in size to 400 beds. In addition, the hospital reorganized as the Marcus Welby Healthcare Corporation in order to expand into nursing home, home health, and other related ventures.

In the 1990s the city had grown to reach Marcus Welby Hospital's doorstep. MWH was no longer merely a suburban hospital. It became a major tertiary hospital serving the metroplex. However, revenues were beginning to dip due to the advent of managed care systems. Its average occupancy rate dropped from 85 to 70 percent.

In response, the hospital merged in 2000 with two other hospitals on the same side of town and formed the Marcus Welby Network. The objective was to curb the loss of patients to other managed care networks by signing up a number of physicians, mainly in primary care but also in common specialties, and then marketing this network directly to employers and also to large insurance companies who would then offer the network to their customers. This effort was partially a bust, but in other ways was a great success. The idea of marketing directly to employers did not work because the network does not cover a broad enough geographic area to appeal to the largest employers, and smaller employers prefer a network that includes most of the physicians in town so they don't have to force their employees to switch doctors.

The network was a great advantage, however, in contracting with insurers. Because of employers' demands for broad networks, and regulators' requirements that managed care insurers provide adequate network capacity, insurers feel they have to include Marcus Welby's facilities and physicians in their networks if they want to sell insurance in the region. Therefore, over the past few years, Marcus Welby

Recently, however, Marcus Welby is starting to lose some of its most profitable business to physicians on its medical staff who have opened outpatient surgery and radiology clinics. There are rumblings that some doctors might even open a competing hospital that refuses to take Medicaid or uninsured patients. And, there is talk among area physicians of starting their own ACO, in order to benefit from enhanced Medicare payments. Marcus Welby is now considering what its next moves should be.