Kenneth D. Pearsen, MD (left), chief of radiology, and John Mycek, director, imaging services, Kaleida Health Care System.

Having ended fiscal 2001 some $62.5 million in the red, bringing its 5-year-straight run of losses to well in excess of $100 million, Kaleida Health Care System was not in a strong position from which to ask for a loanleast of all a loan to acquire a PACS, an investment consisting largely of difficult-to-collateralize software.

In this instance, however, one fiduciary's unacceptable risk proved to be another's highly attractive value-proposition. For, indeed, after months of negotiations, Buffalo, NY-based Kaleida obtained not only the money it needed to acquire a PACS large enough to handle the imaging traffic of a quintet of busy hospitals, it also secured from the same source funding to pay for other equipment - MRIs, CTs, cardiac catheterization laboratories, patient monitors, and morethat it might later find useful in ensuring its place as the No. 1 health delivery system in the Buffalo market.

The money, in the form of three separately structured loans (one of which involves tax-exempt dollars), totals $67 million. No, this is not a case of a lender gone mad. But it does represent creativity and flexibility on the part of the health care entity and the willingness of the vendor to look beyond the unnerving balance sheets and worrisome credit reports in order to see the underlying worth of a potential customer and to establish a genuine partnership with them.

FAVORABLE REVERSAL OF FORTUNES

This tale begins in 1997, with the formation of the nonprofit Kaleida by a merger of the five formerly competing Buffalo hospitals and their related business entities, which included a visiting nurse association (now recognized as the largest in the nation) and various long-term care facilities.

Off to an inauspicious start, Kaleida lost money that first year and continued doing so thereafter due to its reliance on antiquated processes, badly outdated technologies, and a corporate culture willing to tolerateeven excusepoor service.

"It was not a winning formula," admits Bob Glenning, executive vice president and chief financial officer.

By 2002, the outlook for Kaleida had grown bleak enough that the board of trustees decided to remove the CEO and replace him with a rescue specialistWilliam (Bill) McGuire. Moving quickly, McGuire wrought changes that resulted in a complete reversal of fortunes less than a year later: instead of suffering the $85 million in losses projected pre-McGuire for the end of fiscal 2004, Kaleida expects now to close out the year slightly in the black, Glenning reveals.

One of the areas targeted for urgent attention from McGuire and his newly reconstituted management team was radiology.

"We had a poor track record in our physician community with radiology," says Cynthia A. Ambres, MD, MS, executive vice president and chief medical officer of Kaleida Health. "It was clear that the department needed to be reinvented across the system.

"We began recruiting for leadership and staff positions. Kenneth D. Pearsen, MD, was identified and the clinical leadership began working with him to put a strong group of clinicians together. Western New York Radiology Associates (WNYRA) was born with a mission of achieving excellence," Ambres recalls.

Pearsen was chosen as head of the newly formed group, and one of WNYRA's initial tasks was to conduct a penetrating assessment of the situation to identify problem areas and suggest effective remedies. Pearsen's investigative team reported back that the single most important action Kaleida could take was the acquisition of PACS.

"Our task was to recommend to Kaleida the one vendor that not only could deliver the most appropriate PACS product but that also could offer the most attractive financing package," says Pearsen. "We wanted this to be a win-win for Kaleida, for us, for the patients."

However, at least initially, the radiologists and the other major stakeholdersKaleida's administration and its division of information technologywere divided with regard to which vendor's proposal constituted the best all-around deal.

"We in IT had a favorite on the basis of it being easy to service, while administration liked the one that had the best cost profile, and the radiologists were keen for the product they considered to be the technologic top performer," says Francis J. Meyer, Kaleida vice president and chief information officer.

Compounding matters, it so happened that a small PACS had 18 months earlier been acquired by one of the Kaleida entitiesChildren's Hospital of Buffalo. The radiologists at Children's were not affiliated with Pearsen's group, and they were comfortable with the PACS then in place. Unfortunately, to achieve what Pearsen, McGuire, and the rest of the PACS team wanted, the PACS at Children's would have to go.

"It took some cajoling to get the radiologists at Children's to accept the idea of switching to another PACS," says Pearsen. "What won them over was, first, we made sure their chief of radiology was consulted every step of the way and allowed to have input in the process; second, we were able to demonstrate to them how the new PACS would perform better and help them provide a higher level of quality care."

Pearsen says similar strategies were used to obtain buy-in from the decision-makers in Kaleida's IT division and administration.

"Although radiology drove the process, we all were able to come to an agreement as to which PACS vendor to go with because we approached the selection process as a true team effort," he explains. "Looking at each candidate vendor's offering from the standpoints of usability, service support, industry reputation, and experience, it was soon evident to each stakeholder that we could all agree on at least one of the possible choices."

BEST OVERALL PACKAGE

Identifying the winning candidate required much careful weighing of the various proposals, since each was attractive in its own right.

"All the vendors were wonderful; I would not characterize any of them as holding back or unwilling to do some very innovative and cutting-edge things with us," says Glenning. "And every vendor showed a willingness to do whatever it took to get our business."

In the end, Glenning confides, the choice came down to the vendor providing the best overall combination of technology, installation ease, serviceability and, most important of all, generous financing.

"We wanted to acquire PACS on credit rather than as a capital expenditure," says Glenning. "We felt this would leave us with more capital to be able to acquire additional needed equipment for radiology along with assets other departments were asking for."

Accordingly, each vendor presented Kaleida with a plan to finance the PACS acquisition and subsequent implementation. Glenning says the loan options were much alike from vendor to vendor, the only substantive difference being the rate of interest.

"I don't recall the exact spread of those rates, but they were very competitive," he indicates, adding that the possibility of alternatively obtaining the money from a lending bank or other financial institution was never contemplated since the possibility of landing a better deal from those types of sources struck Kaleida executives as unlikely.

The vendor with which Kaleida ultimately inked a deal came up with a program to supply the health system with a $20 million line of credit, a $20 million tax-exempt loan, and another $27 million in longer-term loans.

"To access that $27 million will require the approval of the Department of Housing and Urban Development (HUD) because part of that sum would be used for construction of buildings," says Glenning. "We're in discussions with HUD on that now. So the $27 million isn't yet a prominent feature of the transaction.

"As for the tax-exempt loan, it qualifies as tax-exempt for the reason that it is arranged under the auspices of a New York state government agency, even though the loan itself is carried by the PACS vendor. The interest rate on it is, as a result, very, very competitive."

The icing on the cake was a promise by the vendor to infuse its success-oriented corporate culture within the Kaleida organization. "They're going to bring to us their management culture, a process that is going to include comprehensive education and training for our management staff," says Glenning. "This will help move us even more dramatically toward our goal of having a culture of accountability. That's important to us because, ever since Bill McGuire came here to head Kaleida, we've been working hard at replacing our old culture of putting up with mediocrity. We had mediocrity because we did not have accountability. For us to be truly successful as a health delivery system, we have to be an accountable organizationaccountable to our patients, to our medical staff, to the community."

NOT HAMSTRUNG

For these favorable terms, the vendor asked for something in return, above and beyond a guarantee of repayment of the loans: it wanted Kaleida to commit to a semiexclusive buying arrangement in which, for the next 7 years, the enterprise will spend a sizable majority of

its capital budget on this vendor's products only.

"The vendor was very interested in a long-term relationship," says Glenning. "A kind of strategic asset that any hospital has is its spending. And at Kaleida, we spend a lot of money every year on capital, on supplies. The vendor understands this, and so sought to leverage our transaction. We had no problem with thatour CEO has been calling for us to form more partnerships along these same lines with vendors. Rather than have a lot of shallow relationships with different organizations, he's been exhorting us to see what benefit we could get by being better, deeper partners with just a few organizations."

Although the exclusivity arrangement with the PACS vendor could be construed as confining, Kaleida enjoys sufficient latitude within the arrangement to satisfy all stakeholders.

"The language specifies that we will purchase from this vendor as long as the vendor provides state-of-the-art product comparable to their competitors' and at prices that are comparable," Pearsen says. "If we need a piece of equipment and there are certain areas where this vendor may not be the best, if we find a competitor's product that has better specs and a lower price, our vendor can try to match it. If they can't, then we have no restrictions to keep us from purchasing elsewhere. We can buy best-of-breed if our vendor can't meet the need. That's a completely fair way to go, and the vendor had no problem with it because they're confidentand so are wethat in almost every single product line, they're going to provide an excellent product at an excellent price."

More evidence that the two parties view their arrangement as a real partnership comes from the vendor's acceptance of risk for specified levels of PACS functionality.

"They've agreed that the system will support a filmless environment, that it will be able to handle a certain high volume of image traffic, and that it will provide images of high quality in accordance with mutually agreed upon performance standards," says Glenning.

The vendor also has proposed paring some of the risk from the PACS purchase in general by taking steps to maintain the equipment at state-of-the-art level for years to come.

"With PACS, you're largely buying software that will be obsolete in 18 months," says Glenning. "The one good thing about software, though, is that it's easy to reconfigure so as to keep it on the cutting-edge beyond that 18-month limit. In our case, the vendor has a software migration plan that will maintain the technology where the market is."

ANXIOUS TO DEAL

It was not merely the vendor's desire to create a long-term relationship that prompted it to offer the sweet deal it did. As it turns out, a strong motivator was the vendor's lack of a significant presence in Buffalo.

"The vendor was very anxious to make a dent in our market," says Pearsen.

Not surprisingly, then, negotiation stumbling blocks were almost nonexistent, Glenning says. "At no point were we at loggerheads," he tells. "There was never a time when anyone felt like getting up and walking away from the table."

Negotiations started in June 2003; the parties shook hands and uncorked the champagne bottles 4 months later. "We had meetings every couple of days during that entire time," says Glenning. "They were coming in to learn what we wanted to accomplish. It was a discussion...OK, you need new equipment, you want to focus in areas like patient monitoring, radiology, you want to turn around the culture in the organization, you want some longer term and shorter term financing for operations, let's

talk and learn how we can come to agreement.'"

Pearsen says he underestimated the amount of his time required after the deal was reached. "Once you've got a signed contract, then comes implementation," he notes. "Our physician team put in a minimum of 1 to 2 hours a day on that aspect alone."

A reason for the hefty investment of time is that Kaleida sought a fast implementation of PACS. "We wanted to get all five up and running simultaneously," says CIO Meyer. "But we decided to do just Buffalo General first and hold off on the other four until we were sure the system was going to work as promised. If anything, we wanted to implement faster."

However, were he guided by hindsight, Glenning says he cannot imagine proceeding any differently with this venture.

"The only advice I can offer to other enterprises contemplating a similar move is to make sure the medical staff and radiologists are on board every step of the way," he says. "That's because PACS is in many respects a very personal decision. It's not going to be received well if the radiologists tell you they want PACS and then you force down their throats one they've never seen or commented on, one that's been chosen with the administration's needs uppermost in mind.

"On the other hand, in dialoguing with your radiologists on their PACS expectations and needs, it gives you an opportunity to explain the parameters of what you on the business side will be dealing withthere are only so many dollars and we want to get for our patients the best we can with that limited amount of money."

Pearsen says Kaleida's deal-making was facilitated by the fact that the 22 radiologists affiliated with WNYRA are, down to the last doctor, "a group of forward-thinking practitioners who knew that PACS was the way to go. Those who were not technically savvy totally put their faith in those of us who were and let our due-diligence team come to them with a recommendation. The people who were technically savvy were extraordinarily so, having worked with PACS before at other institutions and having a sound knowledge of implementations."

But credit also must be given to CEO McGuire. Without his determination to fix what ailed Kaleida, the enterprise might never have received back even a single response to its PACS RFP. As Glenning aptly puts it, "The vendors would have said to us, You lost $62.5 million heading toward $85 million and you want us to take you seriously about supporting your business? Get real."

Rich Smith is a contributing writer for Decisions in Imaging Economics.