Catholic Healthcare West, Tenet Form Joint Venture

Not-for-profit system partners with for-profit firm to create a 7-hospital healthcare system

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CEO SUMMARY: This consolidation initiative brings together the resources of both hospital operators. The objective of the partnership is to more efficiently align services in California’s San Joaquin Valley. This is a proactive step that anticipates further reductions in reimbursement and inpatient admissions in California’s competitive environment.

By Pooling Resources in California’s Northern San Joaquin Valley, Catholic Healthcare West (CHW) and Tenet Healthcare Corporation are creating a new business model for hospital integration.

The announcement, made last month, brings together five hospitals owned by a not-for-profit hospital system, Catholic Healthcare West, with two hospitals owned by Tenet, a for-profit hospital firm. The partnership will operate under the name Central Valley Healthcare System LLC.

Unlikely Partnership

The unlikely partnership between not-for-profit and for-profit organizations illustrates a key theme emphasized by THE DARK REPORT: regionalization of clinical services. The motive of both partners is to align their existing service infrastructure so as to meet the rapidly evolving needs of managed healthcare in the region.

It is a 50-50 partnership and will not require the exchange of assets or merger of any facilities. The goal of the partnership is to create a delivery network that improves the combined system’s ability to enter managed care contracts which cover the service area.

The partnership intends to accomplish this by integrating services. It will offer increased access points in several counties, serving a population of 1.5 million people. Because information is an essential part of a managed care system, both partners intend to share data and experiences.

Effectively, the partnership creates a power base in the area south of Sacramento. It is a strategic business move to make it more difficult for major integrated healthcare systems in Sacramento to expand into the home turf of CHW and Tenet.

Hospital laboratory administrators should understand the consequences of this partnership between CHW and Tenet. It is a new business model which will be closely watched by the hospital industry. If the partnership proves successful, expect to see similar partnerships between for-profit and not-for-profit hospital organizations.

What drives this deal, and others to follow, is the need to regionalize clinical services, reduce overcapacity, and eliminate redundant clinical resources. The fact that it occurred first in California validates the perception that managed care in the state is forcing healthcare providers to consider every option for lowering cost, improving clinical services and offering regional coverage.

This should sound familiar to hospital laboratory administrators. These are identical economic reasons that support the formation of regional laboratory networks. It also is a wake-up call. If regionalization of clinical services is going to occur, why should laboratory directors and administrators at individual hospital laboratories delay organizing some form of regional laboratory services?

As this partnership between CHW and Tenet becomes operational, expect to see regionalization and consolidation occur to the laboratories at the seven participating hospitals. The economic benefits of consolidating laboratory services are too great to be ignored. Thus, consolidation will occur relatively quickly.

Because of the newness of this partnership, operational details have yet to be addressed by either company. CHW is the majority partner, so it will direct much of the planning effort. For these reasons, a number of months will pass before any plans involving laboratory regionalization are drawn up.

Unprecedented Partnership

However, such plans will happen. Assuming that this unprecedented partnership moves forward, at some future date laboratory services will be consolidated to eliminate redundancy and to create a regional system.

Keep in mind the element which makes this partnership notable. It is a venture between a not-for-profit hospital organization and a for-profit hospital corporation. Expect to see more of these types of arrangements. It is cost reduction and regionalization which justifies their creation.

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