Aurora plans Grafton hospital

Health system also buying area's largest physician group

Milwaukee Journal Sentinel, August 1, 2007

By GUY BOULTON and LAWRENCE SUSSMAN

Aurora Health Care said Monday that it plans to build a hospital in Grafton, a move that will give it an entry into the affluent suburbs of northern Milwaukee and southern Ozaukee counties.

The state's largest health care system also announced a deal to buy Advanced Healthcare, the area's largest physician group, employing about 250 doctors.

The acquisition follows Aurora's pattern of entering new markets by buying or aligning with a large physician practice that can provide a new referral base for a hospital.

It also comes about one year after Aurora won approval to build a $189 million hospital in Summit, close to Oconomowoc Memorial Hospital, in western Waukesha County.

The non-profit health care system did not disclose the purchase price for Advanced Healthcare or the projected cost of the 80- to 90-bed hospital near the I-43 and Highway 60 interchange.

The combined cost, however, is conservatively estimated at $250 million by people in the health care industry.

Nick Turkal, a physician and Aurora's chief executive, said the two moves will increase competition and improve the quality of health care in the metropolitan market.

They are part of Aurora's longstanding goal of building an integrated health care system throughout eastern Wisconsin.

But competitors and others contend that building a hospital near Columbia St. Mary's Hospital Ozaukee - which is completing a $72 million expansion - will increase health care costs by creating unneeded capacity.

"The question for these non-profits is, who's being served?" said Robert Heaps, executive vice president of Hays Companies-Benefits. "That's my only question. Now you are going to build a hospital next to one that already exists. What's the point?"

But Steve Martenet, president of Anthem Blue Cross and Blue Shield Wisconsin, said that additional competition could benefit the community.

Aurora's expansion also could lessen the geographic concentration of health care systems in the Milwaukee market, particularly with the proposed consolidation of Froedtert & Community Health and Columbia St. Mary's announced this year.

Doubling the doctors

The acquisition of Advanced Healthcare will double the number of doctors that Aurora employs in the Milwaukee metropolitan market.

Advanced Healthcare's doctors now practice primarily at Froedtert & Community Health's Community Memorial Hospital in Menomonee Falls, and Columbia St. Mary's hospitals in Milwaukee and Mequon.

"It's a major shift in physician relationships," said John Oliverio, president and chief executive of Wheaton Franciscan Healthcare. "There will be some disruption in the marketplace as a result of this change."

Aurora would not comment on whether its agreement with Advanced Healthcare contains the standard non-compete clauses that would prevent the doctors from going to work for a competitor.

But Eugene Monroe, president of Advanced Healthcare, said that nothing should change for patients. He also noted that patients make their own decisions on where to get hospital care.

That said, most patients still defer to their doctors. And doctors generally refer patients to hospitals owned by the health care system that employs them.

Doctors also may have a financial incentive: Aurora would not comment on whether the annual bonuses paid to its employed doctors are based in part on their keeping patients within the Aurora system.
The biggest change could be for patients of Columbia St. Mary's hospitals.

Doctors who work for Advanced Healthcare account for about 14% of the referrals to the health care system's hospitals, said Leo Brideau, chief executive of Columbia St. Mary's.

Brideau criticized the move by Aurora.

"You have a community that has a ton of unmet needs in Milwaukee County," he said. "And the last time I looked around, there were no unmet needs in Ozaukee County."

Aurora's move will mean competition for Columbia St. Mary's Hospital Ozaukee, one of the most profitable hospitals in the metropolitan market.

But Brideau also contended that Aurora's move will increase health care costs in the Milwaukee market.

"There is no question among health care economists that adding excess capacity in a market drives up health care costs," he said.

Practice consultants and others have estimated that buying Advanced Healthcare - which employs more than 1,000 people and has revenue well in excess of $200 million a year - would cost more than $100 million.

Competitors also have estimated that the planned hospital will cost $150 million to $200 million.

The two hospitals and the Advanced Healthcare deal combined would mean an investment of at least $450 million for Aurora. That figure does not include losses that the hospital is likely to incur in its first few years of operation.

In contrast, the non-profit health care system spent an estimated $33 million on charity care last year - though this figure doesn't include bad debts from people who may have qualified for charity care but did not apply.

The cost of buying Advanced Healthcare and building a new hospital also could add to Aurora's $1.2 billion in debt.

Aurora reported a profit of $60.2 million last year, up almost 42% from the $42.5 million reported in 2005. Its total net assets increased $102.6 million, in part because of an adjustment on its minimum pension liability. Revenue rose to $3 billion, up from $2.8 billion in 2005.

Welcomed by Grafton

For Grafton, Aurora's planned hospital would mean a new employer. And James Brunnquell, Grafton village president, said the village would welcome the hospital.

Dan Abendroth, president of the Mequon Common Council, was less receptive.

"From a provider standpoint, do we need more medical space?" Abendroth asked. "I don't know."

In Menomonee Falls, Advanced Healthcare employs 72 doctors who practice at Community Memorial. This is out of about 500 doctors on the hospital's staff.

Those doctors don't plan to change where they refer patients, said William Petasnick, chief executive of Froedtert & Community Health.

But Petasnick also criticized Aurora's move.

"At the end of the day, what you have is increased capacity and higher costs," he said.

For its part, Aurora stressed its focus on providing integrated care in a variety of health care settings.

Improving coordination among doctors and hospitals is considered one of the keys to improving quality and lowering costs in the fragmented U.S. health care system.

But the health care systems in the Milwaukee area, which all employ doctors and provide services outside of the hospital, contend they are integrated systems.

"They do a good job of it," said Brideau, of Columbia St. Mary's. "I think we do a good job of it.

"Let's be honest about this. It's not about integration. It's about moving into a market they think can be profitable."