Hospital merger might send an estimated $22 million annually from Kentucky to CHI’s Denver HQ

The rest of the media are fixated on the money – at least $200 million – Catholic Health Initiatives officials have pledged to create “Academic Health Center,” the downtown complex that would combine University Hospital,  Jewish Hospital, Brown Cancer Center and Frazier Rehab Institute.

That and whether reproductive services would be banned by Roman Catholic religious fiat at public hospitals.

What’s not been talked about is the money that will flow back to CHI’s corporate headquarters in Denver should the proposed hospital mega-merger be complete.

And none of the three parties involved in the merger that would create what insiders call “Kentucky Statewide Network”  – CHI, The University of Louisville or Jewish Hospital & St. Mary’s Healthcare – will talk about it.

We tried, but we got no response from media relations executives at the three systems.

So here is what we know, only because insiders pointed it out to us:

In a merger dating back to 2005, CHI already “owns” a majority interest in JHSMH, if you can use the word “owns” when talking about non-profit hospital systems. Based on a review of JHSMH’s  2010 audited financial statements, Jewish pays an administrative fee to CHI in the amount of .85 percent of gross revenues.

Should all the Kentucky health care operations merge, KSN’s total revenue is projected to be $2.7 billion.

Using the .85 percent formula, KSN would then pay $22 million a year to CHI’s Denver headquarters.

Of course, the terms of the merger have never been released.

The question becomes, “Will CHI be a good corporate citizen and demand a lower rate in ‘tribute’ than they’re getting from JHSMH?”

But insiders are telling Insider Louisville that CHI could in fact receive a larger percentage, perhaps exceeding one percent.

The CHI fee is comparable to a franchise fee, styled as payment for administrative services such as purchasing and research. And one source at a major East Coast university said he believes anything below 1 percent seems fair, though he added there is no industry standard percentage administrative rate.

But our local sources are telling us at .85 percent, this fee is nearly four times the value of such services if contracted through hospital consultants.

Those sources tell us the CHI fee more than covers services to affiliated hospitals, and essentially is a method for transferring cash from the local market to CHI corporate.

A cynic might say that CHI’s $200 million proposed investment, which would underwrite University Hospital expanding operations into empty space controlled by financially struggling JHSMH, would be repaid in 10 years.

But that’s assuming the rate would be .85 percent. For all the public knows, the rate under the merger contract could much more onerous.

Which is why it will be so interesting to FINALLY see the contract details.

Here’s the proposed merger by the numbers:

• Combined, the three health care systems would have more than 3,000 physicians and more than 90 locations in Kentucky with combined annual revenues of more than $2.7 billion.
• CHI operates in 19 states and its network includes 73 hospitals; 40 long-term care, assisted- and residential-living facilities; two community health-services organizations; and home health agencies. With annual revenues of approximately $9 billion, CHI is the nation’s third-largest Catholic health care system. In fiscal year 2010, CHI provided almost $590 million in charity care and community benefit, including services for the poor, free clinics, education and research, according to its website. In Kentucky, CHI has eight hospitals, about 1,000 beds and about 1,300 physicians on its medical staffs. The largest, St. Joseph’s in Lexington, has 470 beds. Flaget Memorial Hospital in Bardstown has 52 beds and St. Joseph Berea has 25 beds.
• Jewish Hospital & St. Mary Healthcare has 70 health care facilities with more than 1,412 licensed beds. Jewish has 7,500 employees. (CHI currently has a 25-percent stake in JHSMH. Both are non-profits.)
• University Louisville Hospital has 404 beds. ULH is a separate non-profit hospital. Though it is not “owned” by the university, it is the primary teaching hospital for the University of Louisville School of Medicine.