Update on Potential Affiliation of Madrona Medical Group with St. Joseph Hospital
    

October 29, 2007

To: PeaceHealth Whatcom Region Employees, Madrona Medical Group Employees, Physicians, Community Members and All Interested Parties

From: Nancy Steiger, Regional CEO and Chief Mission Officer, PeaceHealth Whatcom Region, and Erick Laine, M.D., CEO, Madrona Medical Group

Since the August 31 announcement that St. Joseph Hospital (SJH) and Madrona Medical Group (MMG) are exploring affiliation, we have continued to communicate with key stakeholders and have started moving through the steps leading to a decision.

All physicians in the community have been invited to a series of forums to provide open communication and to understand and address concerns. Two forums have been held to date, the first hosted by Nancy and the second by both of us. We were very pleased with the two-way dialogue and frank discussion that resulted from strong forum attendance, emails and personal phone calls. Nancy has assured physicians that discussions with MMG, and affiliation if that is the outcome, will be structured around several critically important principles:

Quality -- Affiliation could improve the quality of healthcare by sharing best practices among a wider range of providers than is now possible. Both organizations have strong programs and the opportunity in working together is to leverage the strength of both organizations to reach higher levels of integration, quality and service. This is about growth that would bring efficiencies and alignment to directly benefit the community.

Access -- PeaceHealth’s mission and values of social justice and collaboration call for a position of guardianship for the greater good of the entire community. We believe that this affiliation could directly improve access for all patients by enlarging the group of providers working to further the PeaceHealth mission. In addition, the success of practices outside the St. Joseph Medical Group is important to PeaceHealth, because it helps ensure that our community has access to a wide range of providers to support the most appropriate care and to respect patient preference.

Health Care Value -- This new relationship will reduce resource duplication and promote better utilization of healthcare resources, for example eliminate duplication of Hospitalist and imaging services. We believe that this increased efficiency will help us to provide excellent care at a sustainable cost for our community.

Overall, affiliation with MMG would contribute significantly to achieving Peace Health’s vision, in particular by expanding the best practices of both organizations more broadly across the healthcare continuum than it is possible for either organization to do alone.

The affiliation process

The process has been designed to proceed through three stages: Discovery, negotiation and approval. If agreement is achieved, a transition plan will be developed. Leaders from SJH and MMG have been meeting weekly to oversee the discovery stage, which has been a major, two-way exchange of information involving organizational structure, asset records, financial statements, job descriptions and so on.

The negotiation stage began this week. The negotiating team from SJH includes Nancy Steiger, Regional CEO/Chief Mission Officer; Dale Zender, Regional Chief Financial Officer and Vice President, Medical Group; Peter Adler, PeaceHealth Senior Vice President for Strategy, Innovation and System Development; and Stu Hennessey, PeaceHealth Senior Vice President for Legal Services.

From MMG the negotiating team includes Erick Laine, M.D., CEO; Jim Bochsler, M.D., President and Chairman of the Board; Michael Geist, M.D., Vice President of the Board and Chief Medical Information Officer; David Finnigan, M.D., Medical Director, and Keith Tromburg, Chief Financial Officer.

A series of negotiating meetings are being scheduled in November and early December to work out agreements needed to complete a transaction and begin the operations of the new physicians within PeaceHealth.

Timeframe

In early November, the PeaceHealth system and Whatcom Region board members will conduct an ethical discernment, a formal process that considers whether and how affiliation would be in alignment with its mission, vision and values.

Several levels of approval will be needed if a formal proposal to affiliate is developed. This would include approval by the MMG board and two-thirds of MMG shareholders, by the PeaceHealth Whatcom Region governing board and the PeaceHealth system board. If discovery, negotiation and a proposal proceed on the anticipated timeline, final approval could be voted upon by the boards of each organization by late January.

Our plan is to share information as each phase is completed. However, due to a confidentiality agreement, information will be limited during the discovery and negotiation stages.

We continue to be very excited about this opportunity to enhance our promise of providing safe, evidence-based, compassionate care for the communities we serve.