Analyst: Hospital developers must look at partnerships

David Strow

Friday, July 13, 2001 | 10:48 a.m.

A pair of businessmen say they plan to build the largest hospital in Nevada somewhere in the Las Vegas Valley.

The Nevada Medical Specialty Center would be an 800-bed hospital complex -- about 150 beds larger than Las Vegas's Sunrise Hospital and Medical Center, currently the state's largest. It would combine at least four separate specialized hospitals, including a cardiovascular hospital, children's hospital, rehabilitation hospital and behavioral health center.

It all adds up to a projected cost of $700 million. While that would be a fairly modest investment for a casino on the Las Vegas Strip, it's considered massive in the hospital business.

"I don't think anything like this has ever been done (in the United States)," said Bob Nimon, managing partner of Genesis Health Care International Inc., a Houston-based consulting firm working on the hospital's plans with the developers. "It wouldn't work any other place in the United States, in our opinion. But Las Vegas is prime for it."

Certainly, no one's disputing the demand for new hospitals in the Las Vegas Valley is high, and that such a project would be good news for the area's economy and residents.

"If it happens, it could be a great boon to the area," said Somer Hollingsworth, chief executive of the Nevada Development Authority. Hollingsworth said he's introduced the pair to UNLV President Carol Harter and Dr. Robert Miller, dean of the University of Nevada School of Medicine.

But there's a huge catch to this proposal, industry observers say: Unless the developers can partner with a powerful hospital operator, there's little chance a new for-profit hospital could be commercially viable.

"If this is a single hospital they're going to build, and they do it alone, that doesn't make that much sense," said Henry Reukauf, a health care industry analyst with Deutsche Banc Alex. Brown, a New York investment banking firm. "If you joint venture with (a large health care company), something like that, it makes all the sense in the world. A single hospital is a tough way to go."

Without a partner, Reukauf said it could be difficult for the development company, Radix LLC, to find investment dollars. But a Radix spokeswoman said that isn't a concern.

"My understanding is that they have the funding substantially in place," said Sharon Rorman, spokeswoman for Radix. Two out-of-state investors have been secured, but won't be announced until a location is nailed down, she said.

Three locations are under consideration: the northwest valley, the Beltway and Decatur Boulevard, and Henderson.

Who will run the hospital, where it will be located, who will provide financing -- all these questions remain unanswered.

Currently, the Las Vegas hospital market is concentrated in the hands of two for-profit hospital operators: HCA-The Healthcare Company and Universal Health Services Inc. Universal is the most prominent, with three local hospitals: Desert Springs, Valley and Summerlin. HCA operates Sunrise and MountainView hospitals.

Both companies are looking at expanding their market presence in Las Vegas. In June, Universal proposed building a 180-bed hospital in North Las Vegas that would open in 2004, but a city planning commission hearing on the matter was delayed after the company failed to submit an impact statement in time with the commission.

In January, HCA officials said they wanted to build a third Las Vegas hospital, but didn't provide details or a timeframe for construction.

These companies are massive. HCA is the nation's largest for-profit hospital chain, with 194 hospitals and 77 surgery centers. Over the first three months of 2001, it reported a net profit of $326 million and revenues of $4.5 billion. Universal, meanwhile, posted net income of $36.2 million and revenues of $676.9 million. It owns 70 hospitals in the U.S. and France, and 24 U.S. surgical and oncology facilities.

The remainder of the area's 10 hospitals are scattered among a number of operators. Lake Mead Hospital in North Las Vegas is owned by Tenet Healthcare Corp., another leading for-profit health care company; University Medical Center is county-owned; the two St. Rose Dominican hospitals in Henderson are operated by Catholic Healthcare West; and Boulder City Hospital is an independent non-profit.

Radix, incorporated in late 1999, isn't in the league of current Las Vegas hospital operators. One Radix principal, Roy Bowles, is a local engineer, while principal Michael Rorman owns a North Las Vegas company called VGT Aircraft Painting.

"They have management experience, so there's a certain depth to that," Sharon Rorman (Michael Rorman's sister) said. "As far as how they attract investors, what they do is go with a solid business plan."

The financial performance of companies like HCA and Universal clearly demonstrate money can be made in running hospitals and medical centers. But data on the Las Vegas market show that the Clark County hospital market is a particularly competitive one.

The state's Division for Health Care Financing and Policy reported that Sunrise turned the biggest profit from hospital operations in 1999 at $29.8 million. Financial numbers for 2000 aren't yet available.

Operating revenues at Sunrise increased 14 percent in 1999 to $331.7 million. UMC also fared well, reporting a profit of $6.4 million (up 16 percent) and operating revenues of $307.2 million (up 12 percent). Summerlin went from a net loss of $4.4 million in 1998, its first full year of operations, to a net profit of $719,000, while operating revenues shot up 61 percent to $56.1 million. Lake Mead's profit more than doubled to $6.7 million, despite an 8 percent decline in operating revenues.

But not everyone made money. St. Rose Dominican and HCA's MountainView each recorded slight operating revenue increases, but both reported net losses from hospital operations in 1999 -- $10.2 million for St. Rose Dominican, $2 million for MountainView. Desert Springs and Valley both reported operating revenue and net income declines.

But the financial picture for hospital companies has shifted since 1999, Reukauf said.

Hospital companies had suffered because of cuts in health care spending, particularly in the amount of reimbursement they were entitled to receive from Medicare, Reukauf said. Now, those reimbursements are returning to their former levels.

"For-profit hospitals have really gotten themselves together," Reukauf said. "The cuts really forced hospitals into thinking how to build profitability."

Cost-cutting was one measure, and that should result in even healthier profits with new changes in Medicare reimbursement, Reukauf said.

But the other factor working for the big boys in the hospital business is simple market power. Since a few companies so thoroughly control the for-profit hospital business, they were able to negotiate healthy increases in the rates they charged managed care organizations.

That kind of muscle can work against small competitors, Reukauf said.

"If you're in a network, you pick up all the managed care contracts," Reukauf said. "(Without an affiliation), someone like HCA might throw their weight around and say, 'Don't contract with these guys.'

"If you're big, and you have a big footprint, you can sit across the negotiating table and do well. If you don't have that, the managed care companies can take advantage of you."

This isn't lost on the Radix team. Genesis is trying to negotiate partnerships with large non-profit health care organizations, such as Johns Hopkins and the Mayo Clinic, and no one's ruling out the possibility of joint venturing with a huge hospital operator.

"The negotiations are still under way," Rorman said. "They haven't come to any firm agreements on that yet, but it's something they're considering."

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