SCOTT SHEPARD

When a patient at Delta Medical Center takes his meds, they are counted and logged by the hospital’s owner.

When his family takes a break in the cafeteria, the owner is there, too, ready to pour coffee and serve up a slice of apple pie.

That’s because a year ago, the two owners of Delta were ready to cash out and retire after a 7-year turnaround effort. They had been in negotiations to sell the property to Merit Health Systems LLC, a hospital chain based in Louisville, Ky., but suddenly changed course and sold the hospital to the employees. It’s believed to be the only employee-owned hospital in the nation.

Creating an Employee Stock Ownership Program (ESOP) was a way to reward employees for sticking it out during the dark days, when they could have taken more secure jobs at a bigger facility. The ESOP has turned into a powerful way of attracting talented people, and shaping the attitude of the staff.

“Every day, I notice there is no litter blowing around our campus,” noted CEO Gene Faile. “If something is out of place, the first person to see it will fix it. Everyone here knows that this is their hospital.”

In 1999, the struggling hospital was purchased by Neil McLean and Craig Watson, who implemented a host of strategies that made the place profitable and distinct in the Memphis market.

Throughout the 1990s, Delta — once better known as Eastwood Medical Center — was a distressed property, changing hands several times and even threatened with foreclosure by unpaid contractors. It had once enjoyed the status as a private, upscale alternative to the big hospitals; even the cafeteria was known for its fine-dining experience, with the lobster highly recommended by local food critics. But managed care shifted the contracts to Baptist and Methodist and Eastwood was left to flounder.

Rather than compete head-to-head with the big guys, McLean and Watson chose to use smallness as an advantage. Delta concentrated on recruiting physicians with unique services, and general surgeons who preferred a smaller environment.

The hospital also targeted specific services, such as elderly patients with diabetes, pneumonia and congestive heart failure. Ambulance crews with the Memphis Fire Department know that when they pick up a heart failure patient at a nursing home, they can get fast in-and-out service at Delta. And while they wait, there’s a place for their paperwork, plus the hospital’s famous peanut butter and jelly sandwiches.

“We don’t have to haggle with the CV and brain surgeons,” Faile said. “If you’re a surgeon at a large facility, you often can get started on time or you’re bumped because of a trauma case.”

Faile was lured to the top job from Appalachian Regional Hospital in Middlesboro, Ky., in part because of the ESOP. When he retires, Faile can sell his accumulated shares back to current employees and have a nice pile of cash. Until then, those assets continue to provide Delta with working capital for continued growth.

Delta also offers a 401(k) plan, but the reality is that most low-wage hourly workers cannot afford to participate. With the ESOP, an employee only has to log one year of service and 1,000 hours to begin receiving shares at no charge. They cannot sell those shares until they quit or retire.

“Even if you’re the lowest-paid employee, if you work hard you can still benefit,” said COO Mary Hammons.

A loan was secured to pay off McLean and Watson, with current cash flow retiring the debt. The better the hospital performs, the faster the debt is paid and the more stock is issued to workers. That gives everyone a powerful incentive to improve performance and efficiency.

Since they don’t own corporate shares, workers cannot sell them on an open market. Otherwise, Delta could be suddenly starved for cash.

Based on current and projected revenue, the Memphis office of Southern Financial Group sets the value of Delta. Accountants at Watkins Uiberall keep track of the value of individual accounts. ESOPs are not common and it took patience to find an experienced trustee, which turned out to be Renasant Bank in Tupelo.

Having outside management of the plan ensures confidence, Faile said.

“It’s always a plus to get money for free,” said nursing administrative coordinator Latonia Pegues, who came to Memphis from Denver in 2004. “I don’t have to give anything but hard work.”

The ESOP creates a sense of camaraderie and family, she said, with everyone working together. It’s a nice way to work.

“If we all work hard and satisfy the customer, then it’s more revenue for the company,” she added. “I don’t plan on going anywhere.”

Robert Edwards Jr., program director of the geriatric unit and also informatics coordinator, did a lot of ESOP research before buying into the concept, and finally enrolled when he learned the management who had revived the facility would remain in place. He especially likes the quarterly statements that show how his account value is growing, which helps keep him focused on continuous improvements.

Edwards reorganized the supply room on his unit so it operates on a lean inventory, reducing expenses and cutting losses through expired products. When every employee has that attitude, he said, the cumulative benefits are huge.




November 2007