It was the largest healthcare bankruptcy for a not-for-profit healthcare system in the state of New York, but it turned into one of the more remarkable turnaround success stories the state has seen.
Bethpage-based Episcopal Health Services spiraled into Chapter 11 in November 1999 with $150 million in unsecured debt. Last December, the not-for-profit system emerged from bankruptcy. By March 31 of this year, EHS had posted a first-quarter operating profit of $2.2 million.
Like many not-for-profits faced with rising red ink, Episcopal did it by selling its money-losing businesses. And in what appears to be a growing trend for many providers threatened with closure, the system enlisted the leadership of a professional turnaround firm to carry out the job. Abandoning expansion strategies that could not be supported, EHS' board of directors reaffirmed the system's commitment to caring for its medically underserved community.
"As mission-driven organizations, the not-for-profits really do have the public at heart and want to serve," said Ronald Weitz, a principal at Kurron Shares of America, a New York-based management and consulting firm that EHS hired to revitalize the balance of its health system. "And that balance of margin and mission is a very difficult thing."
When Kurron began working with EHS in July 1999, the struggling not-for-profit was composed of two acute-care hospitals, 320-bed St. John's Episcopal Hospital-South Shore in Far Rockaway and 366-bed St. John's Episcopal Hospital-Smithtown on Long Island, now called St. Catherine of Siena Medical Center. EHS also owned and operated three long-term-care facilities, four ambulatory-care centers, a senior housing community and a home health agency.
In fiscal 1998, the organization faced a combined $74 million loss for its two hospital campuses and other ventures; $33.7 million of the loss was attributed to operations.
Far Rockaway, a federally designated medically underserved section of New York City, was in danger of losing critical acute-care services at St. John's Episcopal Hospital-South Shore, the area's only provider of obstetric, dialysis and inpatient psychiatric services. St. John's also functioned as a teaching hospital for residents serving Far Rockaway's culturally and economically diverse population.
"If this hospital were not saved, it would have been tragic for the community," Weitz said. "It took every ounce of skill to prevent that from happening just based upon the magnitude of the losses in 1998 and 1999."
Turnaround started slow
After coming on board midyear in 1999, Kurron's efforts to continue operating both EHS hospital campuses came up short. The system lost $94 million in fiscal 1999 and faced a possible shutdown. Vendors threatened litigation for recovery of assets while others ceased shipping supplies. With mounting pressure from creditors, Kurron steered EHS into Chapter 11 in November 1999 and simultaneously implemented an aggressive turnaround plan.
"There were a lot of difficult decisions to be made, but service wasn't compromised," said Weitz, acting in the dual role of chief executive officer of St. John's Episcopal Hospital-South Shore and chief administrative officer of the system. "We reorganized how care was delivered, closed down a couple of nursing units and redeployed the patients, and we did it efficiently."
Weitz, along with Kurron's founder, Corbett Price, who was formerly a vice-president with HCA Management Co. and is now acting CEO of EHS, began by quickly axing nonperforming assets. In February 2000, Kurron inked a $94 million on-again, off-again deal with Catholic Health Services of Long Island to sell its Smithtown hospital and related properties. Combined losses for EHS' Smithtown campus, Bishop Sherman Nursing Home, Village of St. John's senior-housing facility, Health Services at Home agency and a medical office building adjacent to the hospital were totaling $3 million per month, Weitz said.
Settling labor issue
The sale, which already was being explored by EHS before Kurron's involvement, was set in motion again after employees at the Smithtown hospital, including the local nurses' union, approved new contracts after prolonged negotiations. Catholic Health Services officials had said a restructured nurses' contract was necessary to move ahead with their plans to revitalize the Smithtown hospital.
Left with St. John's Episcopal Hospital-South Shore, 163-bed Bishop MacLean Nursing Home and Bishop Hucles Nursing Home, Kurron improved productivity by shortening lengths of stay and reducing the workforce. From July 1999 to February 2000, 440 of Episcopal's 2,840 employees were laid off, including 250 at the Smithtown campus, to make it more attractive for Catholic Health Services to purchase. Kurron also moved EHS' corporate offices from Uniondale, N.Y., to Bethpage, setting up shop in a converted airplane factory already housing the system's billing and back-end administrative functions.
After only 13 months in bankruptcy, the court approved Kurron's reorganization plan on Dec. 29, 2000, allowing the system to emerge from Chapter 11. Through negotiations with both the courts and its creditors, EHS reduced its $150 million in unsecured debt to $40 million. It will be repaid over four years in large part from operations, Weitz said.
As part of the reorganization, the Dormitory Authority of the State of New York granted EHS a $10 million loan.