Georgia on my mind: New Hospital Development Model Emerges

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Source: Ty-Cobb-Room.jpg - Ty Cobb Room
The facility includes 56 private beds.

Ty Cobb Regional Medical Center in Lavonia, Ga., received its first patient July 1, 2012, after several years of planning and a creative business model that allowed the $57 million state-of-the-art facility to be built when others in the rural county were shuttering their doors.

The inspiration

In Northeastern Georgia, the 62-year-old Cobb Memorial Hospital in Royston closed in June 2012. One month prior, Hart County Hospital in Hart had shut down because “it was no longer financially feasible to operate,” according to a letter sent to the Hart County Hospital Authority.

The reasons that rural hospitals are in danger of failing are multifactorial, says J. Jeffrey Marshall, MD, an interventional cardiologist with the Northeast Georgia Heart Center and medical director of cardiac cath labs at Northeast Georgia Medical Center in Gainesville, Ga. One contributing factor, he says, results from the Hill-Burton Act, a federal law that provided funding to improve the physical plant of rural hospitals while requiring them to provide a “reasonable volume” of free care for residents in the facility’s catchment area. States and municipalities were required to prove the economic viability of the facility prior to building. Also, the law enabled rural areas to build much-needed hospitals, nursing homes and rehabilitation facilities after World War II.

As these hospitals aged, some fell into disrepair and didn’t meet current building codes. “This can put rural hospitals at a competitive disadvantage in the marketplace,” says Marshall.

While private physician-owned hospitals have been able to avoid certain government provisions, the Patient Protection and Affordable Care Act (PPACA) of 2010 amended the Ethics in Patient Referrals Act, known as the Stark law, to place additional regulatory constraints on physician-owned hospitals. PPACA limits the expansion of these hospitals and effectively prohibits the building of new physician-owned hospitals.

Over the past several years, most counties have wanted their own hospital as a source of revenue, which has caused unsustainable competition in fairly small markets, explains Marshall. Case in point: In a letter to the Hart County Hospital Authority, the hospital’s chairman said that occupancy rates were 30.5 percent in 2006 and dropped to 8.3 percent in 2011. In 2006, the provider experienced a loss of $1 million and $2.76 million in 2011. Small rural hospitals are finding it more and more difficult to make payroll, the letter read.

As a result, Ty Cobb Healthcare System of Royston, Ga., which operated the two hospitals, “determined that neither Hart County Hospital nor Cobb Memorial Hospital, standing alone or together could survive very far into the foreseeable future.” Thus, in June 2010, the state of Georgia granted a certificate of need (CON) to begin a new project.

The new model

To address this shortcoming, the nonprofit Ty Cobb Healthcare, physicians and local jurisdictions partnered to develop a new hospital. The project is comprised of five entities:

  1. Landlord: A real estate company firm, NGTC Health Properties (NGTC), developed and owned the hospital’s land and building;
  2. Tenant: Hospital operating company (Ty Cobb Regional Medical Center);
  3. Joint venture hospital management company;
  4. Medical office building: Physician-owned (Ty Cobb Physician Center); and
  5. Land Investment Company: Physician-owned (Clear Creek Investors).

This model is based in real estate ownership, explains Larry Unger, CEO and managing partner of Medical Partners of America (MPA) in Atlanta, which served as the developer of the project. NGTC was formed by MPA of Georgia to acquire land and develop and own the bricks and mortar of the hospital.

The 57 physicians, including cardiologists and hospitalists among other specialists involved with the project, are not hospital employees. “Physicians are at their best when they can act as private entrepreneurs, because they are more focused on quality patient care,” says Unger.

The physicians own the hospital land and the hospital building. As the landlord, they executed a 35-year lease with Ty Cobb Regional Medical Center, the hospital operating company, according to Marshall, who serves as chairman of NGTC.

“There is no current or proposed federal or state prohibition against physicians owning healthcare real estate or in a joint venture hospital management company,” stresses Unger. “This new delivery model has been deemed to be fully regulatory compliant under Stark and PPACA.” The legality of this project was certified by three national healthcare attorney firms.

The Franklin County Industrial Building Authority contributed the 39 acres of land to NGTC for the campus. To raise funds to build the hospital, NGTC looked to a combination of equity ($9.9 million) and Wall Street bond financing ($47.5 million). 

In addition, the building authority granted a 35-year tax abatement for real estate and 35 years for capital equipment, $3 million in new and improved roads, $75,000 in cash and $225,000 in utility infrastructure.

“Ty Cobb Healthcare owns the hospital license and CON. They also control its operations,” says Unger. “The hospital operator is similar to a tenant who rents space in a shopping mall. For the physicians, it is, in part, real estate ownership.” 

To be a part of the project, the physicians bought into the for-profit real estate company and the other affiliate entities  to maintain their autonomy. “It reverses the costly pattern of hospitals buying physicians,” says Unger.

On average, each physician invested more than $125,000 in the project. Rollout plans call for participation of approximately 80 physicians.

“Because multiple physicians are invested, we are motivated to provide the highest possible care,” says Marshall, who adds that this new facility draws patients from eight counties. 

Phase one of the project consisted of building the 154,500 gross-square-foot hospital, including 56 private beds (eight intensive care unit beds, six labor delivery recovery post-partum beds, a wellness and rehab center and a sleep lab). The partners broke ground on the hospital Dec. 13, 2010, and opened for its first patient on July 1, 2012.

The (fiscal) ripple effect

Lavonia and its surrounding areas were historically sustained by the textile industry, which had long since left the community when the new hospital venture began. “This hospital has created a new economic engine for the community,” says Unger.

This sentiment is confirmed by Lavonia Mayor Ralph M. Owens, who first heard about the project when Ty Cobb Healthcare went looking for land, after it had become apparent that the outdated facilities were unsustainable. He helped to locate the 39 acres on which the hospital was built.

The community has reaped the benefits of the hospital, including new businesses such as a restaurant and a Hampton Inn near Ty Cobb Regional, says Owens. Another developer from Athens, Ga., is considering building new physician offices in the area.

Finally, the hospital may even be instrumental in bringing the textile industry back to the area, according to Owens, who says a Canadian textile company is interested in the area, and could result in 400 to 480 jobs for the residents. “We took them over to the hospital, and it speaks well of our community that we have such a new, thriving healthcare facility,” he adds. 

As the largest private investment in Northeast Georgia in 2011-2012, Owens says he’s “tickled pink” with the financial return on investment that the opening of Ty Cobb Regional Medical Center has had on his community.