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Upheaval at Covenant Health

by Joe Sullivan

Recent management turmoil at Covenant Health could mark a turning point away from the expansionary, exclusionary practices that made it seem bent on health care dominance in the Knoxville area.

After a succession of high-level firings that culminated in CEO Alan Guy getting sacked, Covenant appears to be pulling in its horns. One of Guy's string of hospital acquisitions (albeit a small one in Trousdale) has been sold. The scope of its health insurance operations has been scaled back. And what had been a centralized high command has been dispersed, with separate administrators in whom clinicians have more confidence now presiding over each of Covenant's three main campuses.

But whether this reflects a permanent change in institutional philosophy or just a temporary concession to the overextension and underperformance that led to Guy's ouster remains to be determined. With 9,000 employees and annual revenues of $750 million, Covenant remains larger than all other Knoxville hospitals combined, and some of them still view it warily.

Based on its track record, well they should. Covenant's management team came out of business school, not medical school, and has at times seemed more concerned with market share than community care. In establishing a health insurance subsidiary, PHP/Cariten, a clear aim was to capture business from employer health plans by making Covenant the sole hospital in the health care provider networks established for the plans. Moreover, Covenant managed to gain exclusives with other major health insurers by inducing them to drop other hospitals from their networks—Baptist in the case of United Health Care and UT in the case of Cigna.

PHP/Cariten's president, Tony Spezia, who is now doubling as Covenant's acting chief operating officer, insists that exclusivity is no longer the order of the day. UT is now included in all of PHP/Cariten's health plan networks and St. Mary's is included in some, he states. As for Covenant's deals with United and Cigna, Spezia says, "Getting more favored pricing [from a hospital] is sometimes contingent on maximizing the volume of business that will be delivered."

Until recently, as well, Covenant aggressively pursued the acquisition of physician practices, thus creating captive doctors. And it became all the more a conglomerate by pushing aggressively into the mental health field with the acquisition of Overlook Center and Peninsula Hospital.

In Guy's defense, many of his strategic moves were aimed at combating the threat posed to not-for-profit hospitals such as Covenant by the voraciousness of for-profit hospital chains that were ravaging the country. When the largest of the lot, Columbia/HCA, acquired Parkwest Hospital in the 1980s, the battle was joined locally. (Note: Covenant subsequently acquired Parkwest from Columbia/HCA.) Moreover, Covenant had to adapt to the burgeoning world of managed care in which physicians began taking flat monthly fees per patients instead of fees per service rendered (ergo, the impetus for docs to sell their practices).

But just as the for-profit hospital chain bubble burst and as HMOs became whipping boys politically and economically, so did many of Covenant's aggressive strategies come a cropper.

In its early going, PHP/Cariten was overwhelmed by the claims processing and record keeping associated with insuring 300,000 lives. Losses ran into the tens—if not hundreds—of millions of dollars, and huge cash infusions from its Covenant parent were required to keep it solvent. Since Spezia took command in 1998, its operations and finances have been much improved, and Spezia predicts it will show a profit for the first time this year. Acquisitions of physician practices were, by Spezia's admission, "singularly unsuccessful." After all, what salaried doc wouldn't rather spend an afternoon on the golf course than sticking his finger up the rear end of middle-aged men to probe for prostate enlargement. Getting into the mental health business was also fraught with peril, and its management became a revolving door.

At the same time, Covenant was getting pinched by cuts in Medicare reimbursement rates and by payments under Tenn-Care that failed to cover costs. Resultant cost-cutting, including down-sizing throughout the system, contributed to the swell of grievances from practitioners that led to Guy's downfall.

Not that the Covenant system as a whole was ever in financial difficulty. While officials won't comment on financial results, it's understood that Covenant showed a profit of $3 million last year—enough to keep its head above water—but far short of the $25 million goal that Guy and his board of directors had established for the year.

Even though the Guy-built empire was showing cracks, it maintained its king-of-the-hill posture toward community-wide collaboration involving other hospitals. For example, Covenant refused to join Health Care 21, an alliance backed by employers with health plans that aimed at comparing the quality and cost of care at hospitals throughout the area. Baptist and St. Mary's both cooperated with a Health Care 21 survey of patient satisfaction. Covenant did not (nor did UT or Children's Hospital).

Spezia now insists that "We're interested in more collaboration," and cites a recent agreement with St. Mary's to share responsibilities in hospice care to make his point. Moreover, the chairman of Covenant's board of directors, First Tennessee Bank CEO Larry Martin, has a reputation for civic-mindedness that presumably will carry over in shaping Covenant's mission and selecting a new CEO to fulfill it.

In any event, it needs to be borne in mind that Covenant is a not-for-profit institution exempt from both federal income taxes and local property taxes. Tax-exempt status isn't justified for organizations that compete for market share like department stores. While competition in health care certainly beats a monopoly, Covenant and its counterparts should all take care to put the community's interests ahead of self-serving ones.

May 11, 2000 * Vol. 10, No. 19
© 2000 Metro Pulse