Consultant recommends Sitka’s hospitals merge

For the past year, the SEARHC and Sitka Community Hospital have been in talks about consolidating services. An outside consultant is now recommending a merger and will present his findings to the Sitka Assembly tonight (03-21-17). (Emily Kwong/KCAW photo)

An outside consultant has concluded that Sitka’s two hospitals should merge. Those are the findings of ECG Management Consultants, a firm hired by Sitka Community Hospital and SEARHC last year. Leadership at the city-owned hospital opposes the idea.

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Healthcare is the main topic Tuesday (March 21) night at a special meeting of the Sitka Assembly. They’ll dive into ECG’s report on the future of Sitka’s two hospitals. The 27-page Powerpoint recommends that SEARHC, which runs Sitka-based Mt. Edgecumbe Hospital, purchase Sitka Community Hospital’s assets and absorb all of its health care operations.

The two hospitals have been conversing for months about ways to collaborate. Sitka Community Hospital was interested in a joint venture, where the two medical providers would work as a team. But talks fell apart in January.

“We couldn’t reach consensus,” Sitka Community Hospital CEO Rob Allen said.

A slide from the ECG report says that a merger model “best achieves all the objectives articulated by the City of Sitka.” (Presentation by ECG Management Consultants)

ECG’s Kevin Kennedy, the lead consultant, has concluded that a joint venture is too costly – requiring $20 million in start-up capital – and calls a merger is a win-win for the community. “If Sitka Community does decide to join SEARHC and to come together with them, it not only pays for itself, but it produces so much extra revenue that can be channeled into the health needs of the community,” Kennedy said. A merged venture, he adds, could hire a full-time cardiologist or dermatologist and do away with the duplicate services.

The report also concludes that while Sitka Community Hospital has stabilized its cash flow, there are some dark clouds on the financial horizon – like a negative balance sheet, an expensive electronic medical records system, and deferred capital needs.

“The average age of capital of that facility is well above what we see with other hospitals,” Kennedy said. “There’s going to be some pretty big checks to write. It’s going to be up to the Assembly to decide whether they want to write those checks to try to maintain two hospitals in a city that most people would acknowledge should really only have one.”

Allen disagrees. In the past two years, he’s helped bring the hospital back into financial solvency and has no plans to shut down.

“We’re moving forward like this is not happening and figuring out what we need to do be sustainable, to respond to the competition, and to be successful,” Allen said.

The hospital recently held a visioning session. One of their top goals is to implement a less expensive electronic medical records system, that’s more responsive to changes in Medicare and Medicaid. Allen added that most of the $5.8 million dollar operating loss is from retirement and PERS and “has nothing to do with how financially sound we are.” He also anticipates the hospital will scale down operations in the future. “We need to be the right size, providing the right services, and that’s what our focus is going to be on the next year.”

As for the report? Allen called it “overly pessimistic”about the hospital’s financial future.  “I don’t think our future is quite as dire as that. We have some options and we’re working on different ways to become more resilient and able to respond to a lot of uncertainty.

The decision about what to do next – explore the merger option, maintain the status quo, or something else – rests in the hands of the Sitka Assembly. But for Kennedy, the answer is clear. Should a merger take place, SEARHC plans to retain all employees and give Sitkans a role in in governance. “I really hope that the Assembly decides to avail themselves of that,” Kennedy said. “It’s really the sort of thing that only happens once in a generation.”

SEARHC, which operates 18 facilities throughout the state, hasn’t made a formal offer to acquire Sitka Community Hospital. CEO Charles Clement was traveling and could not be reached for comment for this story.

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