After failing to meet its own budget projections and suffering two consecutive years of huge losses, a Columbia, S.C., system has gotten a break on the state-imposed conditions of its merger.
Palmetto Health Alliance was created in February 1998 with the merger of the two largest hospitals in Columbia, 595-bed Richland Memorial Hospital and 369-bed Baptist Medical Center. The system, which also includes 106-bed Palmetto Baptist Hospital Easley (S.C.), commands roughly 80% of the Richland County market.
The hospitals merged under a certificate of public advantage from South Carolina, which gives them immunity from federal antitrust scrutiny. In return for the COPA, Palmetto agreed to meet 25 conditions. The most significant, applying for the first five years of the merger, include an annual report to the state, a price freeze and a $15 million commitment to community health programs. After that, Palmetto must commit 10% of its profits to public health initiatives indefinitely.
Hospital officials pledged the merger would save $71 million over five years, but Palmetto has continually missed its operating income budget targets.
Although its hospitals were profitable before the merger, Palmetto lost $44.3 million on operations and $41.1 million overall in its fiscal year ended Sept. 30, 1999. Last week, Palmetto announced it lost $42.5 million on operations and $39.2 million total in its most recently completed fiscal year, according to unaudited figures (See chart). The system had budgeted for a loss of $13 million.
As the year progressed, it projected a worse performance. In July it estimating an operating loss of $51.7 million for the year. "The year was not a good year, obviously, but it was better than our most recent projections by almost $10 million," said Kester Freeman Jr., Palmetto's chief executive officer. "Our budget for 2001 we believe is a conservative and obtainable budget."
Freeman said the losses were caused by the confluence of several factors. While Palmetto was struggling to combine operations, managed-care pressures were increasing and the Medicare cuts of the Balanced Budget Act of 1997 were beginning to be felt. In addition, the COPA reduced the system's flexibility somewhat, Freeman conceded.
"But we continue to live up to every COPA commitment we have," he said.
Besides eliminating 310 jobs in 2000, Palmetto asked the state's Department of Health and Environmental Control for COPA relief in the form of a two-year extension to meet its $15 million commitment to community health programs.
The state health department agreed but tacked on $2 million to the required total, for a total of $17 million over seven years.
In a Sept. 21 letter outlining the extension agreement, Leon Frishman, deputy commissioner for health regulations, said Palmetto "is trying to meet the conditions of the COPA as best (it) can."
Only a handful of systems across the country have merged under COPAs, and Palmetto is the second to ask for revisions. In March 1999, Montana agreed to let Benefis Healthcare in Great Falls raise prices faster than set out by its COPA and to lower the system's savings targets. The concessions are worth about $90 million combined (April 12, 1999, p. 16).
Based on Palmetto's unaudited financial data, New York-based Moody's Investors Service downgraded the system's bond ratings to Baa2 from Baa1, citing the system's inability to meet budget projections and its "dismal performance" in 1999.
Other credit-rating agencies that had already downgraded Palmetto are looking forward to the merger's fifth birthday, when the system is officially out from the most onerous constrains of its COPA.
After the five-year mark, Palmetto will be able to consolidate clinical programs more aggressively, seek reimbursement increases in managed-care contracts and eliminate jobs more freely if needed, said Craig Kornett, an analyst with Fitch. "They'll be in a much stronger operating position," Kornett said.
Meanwhile, Freeman says he is hopeful that the downgrade from Moody's is a sign of where Palmetto has been, not where it's headed. "They're looking at history, and we're looking at the future," he said. "We believe we can demonstrate some significant improvement in 2001."
