After gobbling hospitals like a hungry relative at Thanksgiving, Hillcrest Health Care System in Tulsa, Okla., is pushing back its plate.
The system, which surprised analysts this month with a $99 million loss in its latest fiscal year, said it will close a second hospital this year as part of a turnaround plan. It also acknowledged last week that it's close to signing a deal with Dallas-based Triad Hospitals to sell its 50% stake in 116-bed Southcrest Hospital in Tulsa, which opened in 1999 as a joint venture between Hillcrest and Triad.
The moves, along with the closing of Children's Medical Center earlier this year, would reduce the system's acute-care facilities in Tulsa to two from five. The retrenchment represents an abrupt change from the mid-1990s, when the not-for-profit system, which started with the merger of Tulsa Regional, Hillcrest Medical Center and Children's, assembled a 16-hospital regional network of owned, managed and leased facilities in eastern Oklahoma in a span of less than five years.
Hillcrest's market share in Tulsa is about 37%, and it captures one-fifth of all eastern Oklahoma admissions.
Like many systems that expanded rapidly in the 1990s, Hillcrest's bubble burst as a result of managed-care pressures, unprofitable physician ventures and the advent of the Balanced Budget Act of 1997.
Hillcrest will close its 55-bed Doctors Hospital by year-end and transfer services to its two big tertiary facilities, 509-bed Hillcrest Medical Center in Tulsa and 255-bed Tulsa Regional Medical Center. That follows the closing last spring of 90-bed Children's Medical Center.
System officials said their actions will reduce the system's roster of fully owned or managed facilities to 14 and will increase efficiency.
This month Hillcrest announced an overall loss of $99 million for the year ended June 30, including a $25.5 million operating deficit, on revenue of $430 million. That compares with an $11 million overall loss for the previous fiscal year.
The magnitude of the loss surprised ratings analysts, who said they were led to believe the losses would be much lower based on discussions with system officials over the summer. The results prompted Standard & Poor's to lower its rating to B- from BB+. Moody's Investors Service put Hillcrest on its watch list for possible major downgrade, after lowering its rating to Ba1 from Baa2 in July.
System officials said they decided to take several major charges that will position the system for better results in the next two fiscal years. Losses on risk-based contracts anticipated through December 2001 accounted for $31 million of the reported deficit for the year.
Under a turnaround plan, Hillcrest will trim 300 full-time-equivalent positions, about 5% of its 6,000-member workforce, for anticipated savings of $11.5 million annually. It will attempt to negotiate an early termination of its Medicare risk contract with PacifiCare, which expires at the end of 2001. And it will reduce support of its employed physician practices by up to $7 million.
The turnaround plan was prepared by the Hunter Group, a St. Petersburg, Fla.-based consulting firm, and approved by the Hillcrest board this month. Hillcrest President and Chief Executive Officer Donald Lorack Jr. said the Hunter Group began a 12-week project to devise a turnaround plan in July, after the system experienced a sharp financial downturn in its fourth quarter ended June 30.
The closure of Doctors is expected to save $2.5 million annually, said Chief Financial Officer Craig McKnight. Closing Children's trimmed about $4 million, he said.
McKnight said selling its stake in Southcrest will give the system much-needed capital to repay outstanding debt. He said Hillcrest invested $47 million in Southcrest, about $40 million of which was borrowed. Hillcrest expects the hospital, located on Tulsa's growing south side, to remain in its managed-care network. Triad owns no other hospitals in the market.
McKnight said the hospital no longer has the strategic importance that it did when Nashville-based HCA-The Healthcare Co., its original joint-venture partner, had its own hospitals in the market. Hillcrest bought HCA's three Tulsa hospitals in 1998.
Hillcrest will also lobby the Oklahoma Legislature for $20 million in annual assistance. Of that, $16.5 million would fund a gap between the system's costs and reimbursements for Medicaid, with the remainder supporting the cost of supporting three medical education programs, officials said.
Lorack said Hillcrest provides two-thirds of Medicaid care in the Tulsa market, which lacks a public hospital. Revenue pressures from the Balanced Budget Act of 1997 and managed care "mean we no longer have a bottom line to underwrite our significant community service around Medicaid and medical education," he said.
Capital costs for Southcrest, a $60 million facility that opened last year on Tulsa's south side, were responsible for $6 million of the system's losses last year.
After building itself up as a system, Hillcrest will return some function, such as human resources and business office functions, to individual hospitals. "We think the accountability at the local hospital level will work better," Lorack said.