Tampa (Fla.) General Hospital is on the ropes again.
After years of checkered results and a 1996 loss of $23.8 million due in large part to Medicare and Medicaid cost-report settlements, it turned a modest profit in 1997. Then managed care whipsawed the bottom line. The hospital expects a loss of at least $10 million in the fiscal year ended Sept. 30 on total net revenues of $309 million.
"I think managed care is really here. I think it got real in the Tampa Bay region in the last year," said Bruce Siegel, M.D., president of the 811-bed teaching hospital.
The former commissioner of health in New Jersey and past president of the New York City Health and Hospitals Corp. assumed the post 21/2 years ago.
In some ways, Tampa General is like many hospitals struggling to balance revenue shortfalls and cost increases as the lid on government and private-payer payments closes tighter. Managed-care discounts and Medicare reductions will sap a total of $32 million from Tampa General's coffers over the next five years.
Their own worst enemy. Experts say a number of coinciding events are heightening the financial stakes for hospitals. Many are grappling with losses on failed physician and HMO investments. They are also widening use of expensive medical technologies and making larger-than-planned expenditures on "millennium bug" cures. And heightened competition and soaring expectations for quality and service are pressuring the bottom line.
Many of these issues are of hospitals' own making. Instead of minding the core business, they became distracted with acquisitions. Physician and HMO investments were made on the fly, without proper financial analyses and backing. The year-2000 problem got short shrift; when it re-emerged as an issue, management realized that its budget allocations were woefully inadequate.
And as much as providers would like to walk away from payers who toss them lowball rates, few can afford to reject a deal.
Now that they've created massive systems of hospitals, "they've got to feed the animal," said Cliff Oppenheim, a partner with Deloitte Consulting, Cincinnati, a subsidiary of the accounting firm Deloitte & Touche.
Although several government and private-sector reports say hospital profitability hit another record high last year, many say those salad days ended this year (See stories on pages 6 and 48).
Last week, in fact, the New Jersey Hospital Association reported that average operating margins in the state reached a 10-year low of 0.8%.
And that's far from the only negative sign. By dollar volume, downgrades of tax-exempt healthcare debt nationally are outpacing upgrades this year by billions of dollars (See chart). Precipitous losses on operations sparked a number of 1998's most stinging credit reviews.
Moody's Investors Service bounced Greater Southeast Healthcare System's debt rating three times this year. Its $33.9 million operating loss through September prompted the latest downgrade of the District of Columbia system's junk bonds. The system now carries a rating of Caa3, signaling very poor credit at risk of defaulting.
Even "blue-chip" names in healthcare are getting hammered. Both Henry Ford Health System in Detroit and San Francisco-based Catholic Healthcare West saw their ratings bumped this year.
The hospital industry still has significant additional debt capacity, according to the Center for Healthcare Industry Performance Studies, Columbus, Ohio, which tracks hospital financial performance. CHIPS says the percentage of hospitals' total assets financed with debt is declining and debt service coverage is increasing.
Overextended. Clearly, though, some providers are overextending themselves. When 250-bed New York Flushing Hospital Medical Center landed in U.S. Bankruptcy Court in Brooklyn this summer, it reported having about $84 million of debt plus an estimated $41 million of unfunded medical malpractice exposure. With total liabilities exceeding total assets by $58 million, its balance sheet is completely out of whack.
For most providers, though, a bigger problem seems to be the blow they're taking to the income statement.
Standard & Poor's maintains an A- rating on Adventist Health System's bonds, but the agency slashed the Winter Park, Fla.-based system's outlook to negative from stable this year to reflect operating losses. Adventist was the first provider to bail out of Medicare's demonstration project for provider-sponsored networks (Oct. 10, p. 8). Calvin Wiese, Adventist's senior vice president for finance, figures the system lost roughly $20 million on the experiment this year.
Adventist's difficulties exemplify troubles throughout the healthcare industry. "Definitely we're seeing financial performance soften after some very positive results," said Kevin Ramundo, an analyst in the New York-based rating agency's public finance group.
For two years now, Moody's has warned investors to exercise caution in buying and trading not-for-profit healthcare bonds. The agency has predicted a period of turmoil as hospitals form larger systems, adjust to changing physician relationships and enter risk-bearing arrangements. Ultimately, analysts expect healthcare credits to emerge leaner and stronger, but not before a period of wild upheaval.
Turnaround bull market. The nation's glut of sick hospitals is stirring up fresh demand for interim management and consulting services. Turnaround work can produce daily fees in the thousands of dollars, depending on an organization's size and the amount of labor involved.
"We're very busy," reported David Hunter, founder of the St. Petersburg, Fla.-based hospital turnaround firm that bears his name. Recent assignments include a contract to manage Detroit Medical Center, which expects to lose $51 million this year.
Late last week, David Campbell resigned as chief executive officer of the eight-hospital DMC system effective Jan. 31. Campbell, the third top executive to leave DMC this year, said the decision is influenced by other changes under way at the system and by a belief that it was time for him to pursue other opportunities, said a DMC news release.
Campbell, 52, joined the system in January 1988 as chief operating officer and became president and CEO in April 1990.
Campbell will assist in a search for his replacement, DMC Board Chairman Lloyd Semple said.
Howard Brownstein, a managing director with the turnaround firm Executive Sounding Board Associates, Philadelphia, said the market for healthcare turnaround work is "hot and getting hotter." It hasn't been the firm's core focus, "but it is becoming one, and we are in fact adding staff whose specialty is healthcare," he said.
Many firms are taking a crack at healthcare. The Chicago-based Turnaround Management Association reports a 17% increase this year in the number of member firms claiming healthcare as an area of expertise.
Allegheny the bellwether. It was the collapse of Pittsburgh's Allegheny Health, Research and Education Foundation that got people refocused on the challenges facing healthcare providers.
"Allegheny was just a giant wake-up call," said Hunter, whose firm assisted management in stabilizing operations at the system. The forces causing the industrywide shakeup already were in play, he said.
The landscape is dotted with downgrades and defaults, workouts and bankruptcies. Although most hospitals remain flush with cash, some are spending down their reserves to stay afloat.
Bankruptcy attorneys have noted a rise in the volume of hospital cases crossing their desks. Some hospitals are seeking protection from creditors as a last-ditch effort to get their financial houses in order. Others are wielding the bankruptcy laws to attract merger partners. Bankruptcy enables them to slough off or reduce debt owed to creditors so that potential merger partners aren't stuck holding the bag for those obligations (Jan. 12, p. 22).
Even more restructurings of money-losing operations are taking place outside of bankruptcy court.
Earlier this year, the board of Houston's Memorial Hermann Healthcare System decided to cut off funding to OneCare Health Industries, a 650-physician primary-care network, which includes about 92 OneCare-employed physicians. Memorial Hermann is seeking to settle with employed physicians and plans to pull the plug on OneCare Dec. 31.
Hermann Hospital established the not-for-profit physician corporation in 1993 to give itself a much-needed primary-care referral base. But in 1997, the hospital merged with Memorial Health System. Part of the merger's appeal was Memorial's broad geographic distribution and strong ties to community physicians, said Patricia Riddlebarger, a spokeswoman for the system. Although Riddlebarger would not reveal how much Memorial Hermann lost on OneCare, she conceded that the losses were "a consideration" in dismantling the physician network.
As healthcare upheavals continue, creditors aggressively protect investments.
"Vendors into the healthcare arena, especially into hospitals, realize that the credit they're giving the company or the hospital is significantly riskier today," said Bernie Katz, a partner with the accounting firm of New York-based M.R. Weiser & Co. who specializes in troubled loans. "Before they continue to extend credit, they're asking people like me to go in and gain an understanding of the financial well-being of the entity."
Sometimes hospitals and creditors are able to work out financial troubles without having to go to court. Katz helped his client Summit Bank, based in Princeton, N.J., get repaid a couple of years back when Miner's Memorial Medical Center, Coaldale, Pa., was having cash-flow problems, he said. Katz brought in a healthcare finance company that provided the working capital Miner's needed to repay bank debt and avert a crisis.
Bond insurers are toughening up, too. MBIA Insurance Corp., Armonk, N.Y., recently tightened standards for insuring credits rated A and A-, dropped out of the BBB market and raised premiums for all new deals. Its competitors also have bumped up rates, MBIA said.
Whether through higher bond insurance premiums or higher yields on bonds sold on hospitals' own credit ratings, many providers will end up paying more to access tax-exempt debt. And they'll have to answer to bond buyers, who are demanding more frequent and better reports of hospitals' ongoing fiscal and operational health (Dec. 14, p. 37).
No more easy solutions. The truth is few healthcare systems have consolidated services or removed excess capacity piled up through mergers.
"The easy things are gone," said Martin Arrick, a director with Standard & Poor's. Now, he said, systems need to begin asking whether they really need three obstetric services, for instance.
They also need to refocus their priorities. Florida's acquisitive Adventist, for example, is "throttling back" on external growth of the system and placing its best talent in hospital operations. Wiese said he hopes to bump up system earnings before interest and depreciation to 15% in the next two to three years, from roughly 10% now. "We believe it's time now to focus more attention on managing the revenue side of the business," he said.
Hospitals shouldn't use industry volatility as an excuse to avoid doing the spadework, said Douglas Frank, president of West Hudson, a Dallas-based consulting firm retained by Tampa General. There's plenty that can be done to make healthcare operations run more efficiently, he said.
You could argue that at some number, you can't survive. "We're a long ways away from that," Frank said.
There are some exceptions, though. "The unfortunate thing is, there will be some people over the next couple of years who, despite their best efforts, are going to be in serious trouble," he said.