The turnaround at three-hospital St. Francis Health System, Pittsburgh, still has a ways to go.
After suffering a four-notch rating downgrade a year ago, the system's bond rating fell again earlier this month when Moody's Investors Service dropped it one more notch to Ba3 from Ba2. The noninvestment-grade rating affects about $100 million in outstanding debt.
The downgrade comes about seven months after the system hired a Baton Rouge, La.-based turnaround firm to take over the system's operations. Since then, massive restructuring efforts have been under way that include changes in governance, selling or closing some clinical service lines, spinning off owned physician practices and reducing the workforce.
Divesting some of these ancillary businesses, including home healthcare, occupational healthcare and a temporary staffing agency, lets the system "focus much more on what we're in business for," said Joseph Ruffolo, of Pitts Management Associates. Ruffolo serves as the system's interim executive vice president and chief operating officer.
In August, the system shuttered its 136-bed St. Francis Central Hospital, Pittsburgh. The former hospital is being sold for $7.5 million to a development company owned by hockey superstar Mario Lemieux, owner of the Pittsburgh Penguins. The former hospital is the potential site for a new Penguins arena, Ruffolo said.
The goal of the system's turnaround is to break even by the end of the next fiscal year in June 2002. Although the plan allows for the system to be financially viable as a standalone, there is the potential for an alliance with a national or local system.
Fifteen-hospital UPMC Health System, Pittsburgh, already manages a 32-bed hospital St. Francis owns in Cranberry Township, Pa.
On May 1, the system sent out letters to nine possible partners, both locally and nationally, seeking a "potential alignment arrangement," said Shirley Freyer, a system spokeswoman.
She said nine potential partners were solicited, including UPMC, St. Louis-based Ascension Health, and Newtown Square, Pa.-based Catholic Health East, the parent company of 399-bed Mercy Hospital of Pittsburgh, which also was approached.
In its ratings report, Moody's acknowledges that St. Francis has made "significant positive changes" to improve its performance. But the rating agency points out that some significant challenges remain, including continued operating losses, higher-than-expected labor costs, a decline in volume and weaker investments.
The system, which lost $71 million on operations in the fiscal year ended June 30, 2000, expects its operating losses to be about $27 million in the current fiscal year.
Rising labor costs and declining patient volumes are a real concern, said Lisa Martin, a Moody's analyst.
"That could offset the benefit of some of the initiatives," Martin said.