MOBILE, Alabama – Infirmary Health System took over Knollwood Hospital from the University of South Alabama in 2006 with hopes of creating a profitable hospital in southwest Mobile but instead could not overcome a "perfect storm," the system's boss said today.

Mark Nix, president and CEO of Infirmary Health System, said the environment looked good for expansion in 2005, when officials announced the deal: The economy was booming, Baldwin County was growing like gangbusters and Mobile seemed poised to take off with the announcement that the European Aeronautic Defence and Space Co. had selected the city as the site of a planned manufacturing plant to build Air Force tanker planes.

"Everything about Mobile was booming and exciting," said Nix, who announced this week that the hospital on Girby Road would close by the end of the month.

Then the housing market crashed in 2007 and the economy shortly followed. For much of the time since Infirmary Health System has had Knollwood, which it renamed Infirmary Hospital West, unemployment in Mobile has hovered around 10 percent. Heaped on top of that, Boeing Co. won a challenge to the Pentagon’s tanker contract, dashing hopes for the EADS plant.

What’s more, Nix said, President Barack Obama’s health care overhaul has created new challenges for the hospital industry.

“In retrospect, if we’re closing it, we probably would have liked to make a different decision then. I don’t think many people had the foresight to realize that we were going to have a total transformation of the health care delivery system in the United States, and that’s really what we’ve had,” he said. “That’s kind of a perfect storm.”

Consistent money loser

The Hospital Corporation of America, a for-profit hospital chain, built the hospital about 30 years ago and then sold to the University of South Alabama.

Money pit

Infirmary Hospital West, which will close at the end of the month, has lost money consistently since Infirmary Health System acquired it in 2006 from the University of South Alabama. Here is the look at the annual losses for the past five years ending in March:

2011 $3 million

2010 $5.5 million

2009 $7 million

2008 $5.4 million

2007 $5.9 million.

Source: American Hospital Directory.

The occupancy rate at Infirmary West has lagged well behind the state average, which generally is close to 50 percent, and has declined over the past five fiscal years:

2007 23 percent

2008 29.4 percent

2009 29.3 percent

2010 21.8 percent

Source: Alabama State Health Planning & Development Agency

The university struck a deal with Infirmary Health System in 2005 to sell what then was USA Knollwood Hospital.

The pact included a partnership between the two organizations in USA’s Mitchell Cancer Institute and occurred the same week that Infirmary Health negotiated a deal to acquire Thomas Hospital in Fairhope.

Records from the American Hospital Directory show that Infirmary West has run a river of red ink, losing nearly $26.8 million from April 2006 until March 2011, the most recent year available. That is an average of more than $5.3 million a year.

At the same time, the hospital also has been greatly under-used, with an occupancy rate that has declined from 29.4 percent in fiscal year 2008 to 17.4 percent in fiscal year 2011. That compares with a statewide average among acute care hospitals of 48 percent in fiscal year 2008, the most recent year that statewide statistics are available from the Alabama State Health Planning & Development Agency.

On given day in fiscal year 2011, according to the agency, patients filled only about 22 beds in Infirmary West, which is licensed for 124.

Nix said the hospital handles about 10 percent of the emergency room visits in the county.

“It’s a low-volume hospital,” Nix said. “It’s always been a low-volume hospital.”

Unlike Knollwood, Nix said, Infirmary West did not have a built-in patient base of university employees and their families. Nix said declining occupancy is an issue across the industry, which has shifted more treatment to outpatient and home-based care.

Nix said Mobile County’s population simply is not big enough to justify five acute-care hospitals. He noted that Huntsville, which serves most of north Alabama has only two. Dothan also only has two and serves a similar number of people in Houston County and surrounding areas, he said.

The plan when Infirmary Health System acquired the hospital, Nix said, was to attract more physicians to the facility while increasing the number of patients.

“It had a chance to do that,” he said. “But everything about health care reform is about limiting payments in hospitals.”

Obamacare squeeze on hospitals

Nix said the Affordable Care Act, known colloquially as Obamacare, also will squeeze hospitals in several ways.

The law is designed to expand coverage to the uninsured while reducing costs. One of the ways lawmakers envisioned reducing costs was by phasing out money the federal government pays to compensate care that hospitals provide to uninsured people who show up at the emergency room but don’t pay the bills.

By law, hospitals cannot refuse life-saving care. Nix said Infirmary West has spent about $5 million, or about 17 percent to 18 percent of revenues, so far this year on so-called “uncompensated care.”

The payoff to hospitals was supposed to be more insured patients – and thus more revenue -- through an expansion of Medicaid, the government insurance program for the poor. Nix said the expansion would put an additional 425,000 Alabama residents on Medicaid.

But the U.S. Supreme Court threw the cost-benefit balance to hospitals into turmoil earlier this year with a ruling that upheld most of the law but gave states the right to opt out of the Medicaid expansion. Alabama has not formally decided whether it will go along, but several prominent Republican leaders in GOP-controlled state government have opposed the law.

In addition, Nix said he fears many people required to buy insurance will conclude it is cheaper to pay a penalty. That would leave them without insurance, potentially depriving hospitals of new revenue.

Between the lingering economic struggles and the squeeze from reduced payments for uncompensated care, Nix said, perhaps 25 percent to 30 percent of the state’s hospitals – particularly those in rural areas – could be in danger of closing.

“They’re all going to be challenged by this. … If Medicaid does not expand, I think there are a significant number of hospitals in Alabama that will close,” he said.

Statewide trend

Rosemary Blackmon, a spokeswoman for the Alabama Hospital Association, said she could not venture a guess as to the number of hospital at risk of closing. But she said the pressures confronting the industry are real.

“I think it is definitely a statewide issue,” she said. “We’ve got a lot of hospitals that are really struggling.”

Blackmon cited a March 2010 survey showing that of 88 facilities responding to the query, the average profit margin was 1 percent. Only seven had profit margins greater than 3 percent, and removing them from the total, the average profit margin was negative-1 percent.

Forty-one hospitals were losing money.

In addition to the economy, Blackmon said, Alabama hospitals suffer from a Medicare reimbursement formula based on wages. According to a 2009 report by the American Hospital Association, the state’s hospitals received the lowest average payment for their services.

As for the 230 full- and part-time employees at Infirmary West, Nix said he hopes to place all them in new jobs. Every other hospital in the system has openings, he said, and the organization operates 30 health clinics where some also may be able to work.

The system today placed 100 employees in new jobs, Nix said.

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