Detroit Medical Center shocked bondholders last month with an abrupt plunge in its financial projections.
But despite some similarities to Allegheny Health, Education and Research Foundation's sudden and massive bankruptcy, which astonished the industry, Detroit Medical's Chief Executive Officer David Campbell said his system won't follow that path.
Some of the market factors affecting Detroit Medical are working against another major Detroit player, Henry Ford Health System, which Standard & Poor's downgraded late last month.
Like AHERF, Detroit Medical has a large teaching component, operates in an overbedded urban area and owns a large number of unprofitable physician practices.
But unlike Pittsburgh-based AHERF, which ventured rashly into the competitive Philadelphia market, Detroit Medical knows its local market, enjoys community and political support, and has undertaken a relatively prudent acquisition strategy, analysts said.
In a step hailed by analysts, Detroit Medical hired the Hunter Group, a St. Petersburg, Fla.-based turnaround firm. The system expects to regain profitability in 18 months.
Campbell said he's discussed AHERF and other notable system failures with his board and physician leaders.
Campbell served as executive vice president and chief operating officer at Allegheny Health Services, a predecessor of AHERF, before joining Detroit Medical in 1988.
"We've taken proactive steps," he told MODERN HEALTHCARE last month. "We don't want to be faced with an Allegheny-type situation. We can avoid that, and we will avoid that."
Dennis Farrell, managing director of healthcare ratings at Moody's Investors Service, agreed. "We don't believe this is another AHERF," he said.
Nonetheless, Detroit Medical is under close scrutiny. Moody's placed the eight-hospital system on its watch list, indicating the facility has a 50% chance of being downgraded within three months. Standard & Poor's changed its one-to-three-year outlook to negative from stable.
The actions came after Detroit Medical told analysts it anticipates an operating loss of $51 million for 1998, roughly double what it reported in late summer. Revenues are expected to be $1.6 billion.
To some extent, the situation reflects industrywide troubles. So far this year, Moody's has downgraded $10 billion of healthcare debt while upgrading just $1.5 billion.
Bond insurers are showing more caution. Detroit Medical received bond insurance for 1997 but not for this year, said Liz Sweeney, director in public finance ratings at Standard & Poor's. "That could be a sign that bond insurers are backing away from healthcare," she said.
National trends such as cutbacks in Medicare and graduate medical education payments have hit hard in all urban teaching institutions.
Also, Michigan has cut Medicaid funding, shifting recipients to HMOs. Medicaid and Medicare constitute about 55% of Detroit Medical's business, Campbell said.
The system has seen an increase in bad debts as employees get socked with higher out-of-pocket expenses, Campbell said, and tighter Medicaid eligibility standards are increasing the ranks of the uninsured.
Citing some of those market factors, Standard & Poor's downgraded Detroit Medical's rival Henry Ford system to AA- from AA. The agency cited weaker-than-expected operating performance caused in part by heightened HMO pricing competition, which affected Henry Ford's Health Alliance Plan.
Henry Ford expects an operating deficit of $30 million and net income of almost $20 million on $2 billion in revenues in 1998. To offset those results, the system has a $680 million cushion of cash and investments.
Henry Ford has taken several actions to improve its results, according to Standard & Poor's. Among them are a joint venture to operate its unprofitable Cottage Hospital in Grosse Pointe Farms, Mich.; the sale of its HMO operations in northern Ohio; the closure of some ambulatory sites; staff reductions and a 5% premium increase in 1999 for its Health Alliance Plan.
Detroit's other major player, St. John Health System, has had stable ratings.
Campbell said Detroit Medical might scale back on training future healthcare professionals, including more than 1,000 medical students, an issue it will discuss with its academic partner, Wayne State University in Detroit. "I think there are going to be some tough decisions and issues we'll have to work through," Campbell said.
Internally, Detroit Medical has suffered months of construction delays in consolidating its main campus facilities, Campbell said. This fall it halted consolidation of its Sinai and Grace hospitals in Detroit to re-evaluate the scope of the project. Campbell said market conditions may warrant reducing services at those sites.
Detroit Medical also is grappling with a network of 285 physicians. Many of those doctors were acquired in mergers and are employed under a variety of contracts. Campbell said the system has been renegotiating physician contracts since March to create a standard contract, and it has launched a management services organization to improve practice efficiency.
The system has promised to hire more black physicians to address community concerns (See story, p. 33).
Employees from the Hunter Group have temporarily assumed two key positions at Detroit Medical, replacing former Chief Operating Officer Robert Johnson and former Chief Financial Officer Guy LaPrad, both of whom are retiring.
The difficulties have not prompted Detroit Medical to revive merger talks with Henry Ford, Campbell said. Talks between the two were called off last year.