PIECE OF THE ACTION: Unit secretary Lori Schooler works on the second floor of Delta Medical Center. She is one of the nearly 500 employees who will benefit from the Employee Stock Ownership Plan (ESOP) the company recently established. -- Photograph By Amy O. Williams

Employees at Delta Medical Center at 3000 Getwell Road no longer just work there; they also own the place - or at least they will one day.

The possibility comes as a result of a landmark announcement made late last week by the southeast Memphis hospital "with the Getwell address," as it is identified on the billboards approaching the hospital.

Owners Neil McLean and Craig Watson said they transferred 100 percent of the corporation's stock into a leveraged Employee Stock Ownership Plan (ESOP).

As of the date of that announcement, the ESOP, an employee pension plan, took over ownership of the company.

"Craig and I felt we really owed something to the employees," McLean said. "Because of that, we seriously considered the establishment of an ESOP. We could have sold (the hospital) to someone else, but we wanted to give the employees the opportunity to build their own financial security."

Promises, promises

Regions Bank provided loans totaling $21.5 million to establish the ESOP. The two shareholders, Watson and McLean, provided the remaining $10 million in the form of a promissory note. The sellers will be paid back after the bank debt has been repaid.

McLean will remain in his current position as CEO. Watson retired at the end of May, but both men will continue to serve on the hospital's board of directors.

Watson and McLean have operated Delta Medical Center for the past seven years. McLean said they were looking for an exit strategy, and even considered selling the 243-bed general surgical hospital to a corporation that owned other hospitals.

Because of a confidentiality agreement, McLean was unable to identify which hospital group had offered to buy Delta Medical. But, he said, the employees seemed bothered by the idea.

That is when he began to consider the formation of an ESOP. An ESOP is a defined contribution plan similar to a 401k. One of the differences between a 401k plan and an ESOP is the employees do not contribute any of their own money.

The employees will not be at risk and only will benefit in the future, McLean said. Plus, employees get a sense of ownership in the company, which is something that was very important to Watson and McLean.

"You really have a vested interest in the company's profitability, versus a 401k where you just take an income deferral and you invest in some sort of mutual fund or company stock," said Donald Hunt, vice president of Regions Bank and the relationship manager for the hospital.

A rare find

Hospitals do not typically form ESOPs, primarily because most no longer are privately owned. Michael Keeling, president of the ESOP Association of America, said no hospitals are among his current member organizations.

"I haven't seen that done in a free-standing hospital in a long, long time," Keeling said. "We have ESOPs in the health field, but not in a full-service hospital."

Michael E. New, senior trust officer at Evolve Trust Services in Memphis, served as the trustee for the transaction. New represents the interest of the employees in the ESOP.

Only 10,000 to 11,000 ESOPs exist in the United States, New said.

When McLean and Watson initially came to Delta Medical seven years ago, their plan was to stay for five years and then try to retire. Watson, 59, and McLean, who turns 58 this year, decided to form the ESOP now because the hospital is doing well. Revenue increased by 10 percent a year during the two owners' tenure, and the number of surgeries performed at the hospital has doubled in the past two years. McLean said they thought it was the right time to leave. He went to Regions Bank executive vice president Mitch Campbell looking for a strategy.

Campbell suggested an ESOP as an alternative to selling the hospital to a corporation.

"One of the things we focused on was the difference that his employees had made in the hospital being so successful," Campbell said.

They went in with ESOP expert Kelly Finnell of Executive Financial Services Inc. in Memphis, and examined the process. McLean did some further analysis, decided to turn down the offer from the other hospital system and sold the hospital to the employees.

"So now you've got some people there who truly have some ownership, or potential ownership," he said. "And that's pretty special. Rather than converting it to a 401k or who knows what, they'll have that pride of ownership."

A new day dawns

And that fact has not been lost on many of the people who work at Delta Medical. Campbell said McLean told him that he saw a difference in the employees right away.

"Everyone is really upbeat," said Val King, who has worked for Delta Medical for the past four years. "They're excited about having a pension plan."

He said all the employee meetings have not yet been held, and many of the employees did not fully understand what being part of an ESOP really meant. But the ones who knew what an ESOP meant were very excited, McLean said.

"Over the years, this hospital has been owned by a few different groups, and the employees felt like they had no control over their own destiny," he said. "Now they do. The ball is in their court. They now have significant influence over the future of Delta Medical."

Delta currently employs about 500 people. To participate in the ESOP, the only real requirement is they have to have worked at least 1,000 hours a year. Since no credit was given for time served, all current employees started out on equal footing when the announcement was made. And if they remain with the company, they will be fully vested after seven years.

For employees like King, the timing couldn't be better.

"I'm 54 years old, so I'm thrilled," she said. "I'm sleeping much better."