Catholic Healthcare West is on the path to financial stability after five years as a money-losing operation. But the 48-hospital system still lost nearly $120 million last year, and obstacles stand all along its recovery route.
"The turnaround is going remarkably well," said Michael Blaszyk, CHW's executive vice president and chief financial officer. "We beat our expectations by a long shot."
CHW also beat the expectations of Standard & Poor's, but the New York-based credit-rating agency still holds a negative outlook on $2.4 billion of CHW's debt because of continuing losses and an uncertain financial situation.
In its fiscal year ended June 30, San Francisco-based CHW lost $119 million on total operating revenue of $4.8 billion, an improvement over fiscal 2000, when it lost $306.9 million on revenue of $4.5 billion.
In 1999, CHW initiated a turnaround to reverse four years of losses that at the time totaled more than $878 million. That effort has involved staff cuts, new leadership, restructuring regional management and outsourcing expensive functions such as information technology services. CHW also planned to break even in 2002, a goal it still hopes to reach.
Officials acknowledge that the system still faces a range of challenges-from staffing shortages to profitable hospitals' leaving the system. The largest Roman Catholic healthcare organization in the West, CHW cares for some 300,000 patients every year. Like many other not-for-profit hospital systems around the country, CHW faces a challenge not as familiar to its for-profit counterparts: reconciling a community mission to provide substantial charity care with the need to maintain a healthy bottom line.
Despite its recent accomplishments, "new challenges have arisen for CHW that could potentially slow the pace of financial recovery," said Lisa Zuckerman, a director in S&P's healthcare group, in a report released earlier this month.
One of those challenges stems from the seven-hospital Daughters of Charity system in Los Altos, Calif., which in June broke away from CHW. Those mostly profitable hospitals take from CHW some $720 million in annual revenue, according to S&P.
Even after divesting the Daughters hospitals, a divestiture CHW expects to complete by year-end, the system will have to shoulder some of the hospitals' infrastructure costs, Zuckerman said.
Blaszyk said CHW plans to reduce overhead to spread its costs among fewer hospitals.
The exodus of the Daughters hospitals may still plague CHW, Zuckerman said. "Is it a disruption in the middle of a big turnaround effort? Yes. Does that present risks? Yes."
Last year CHW began a restructuring effort to improve what had become a bulky operation that Zuckerman described as a "loose federation of hospitals." With fiduciary control at the regional level, she said, loyalty was to each individual hospital or region rather than to the system as a whole.
That is starting to change. Since February, CHW has eliminated six regional divisions, reducing the total to four from 10. That has helped CHW create "a lot of focus within the organization," Blaszyk said.
Lloyd Dean, CHW's president and chief executive officer, said in a recent earnings announcement that the system's narrowing loss demonstrates its three-year financial turnaround plan is on track. Dean joined CHW in June 2000 following the departure of Richard Kramer, who left the system under pressure for financial problems after 10 years on the job.
"Reaching our goal of breaking even on operations in fiscal 2002 is the best way for us to ensure that we can continue to provide the best medical care for our communities," Dean said.
To that end, CHW has reduced the number of management positions by 25% since the start of this year. The system has also made operational cost-cutting moves such as hiring Dallas-based Perot Systems to take control of its information-processing services. Under that 10-year, $600 million agreement, CHW is guaranteed $15 million in annual savings.
Blaszyk said he expects all of CHW's hospitals to be using the same system within three years.
As CHW continues down its turnaround path, one pebble that could trip up the system is a new mandatory nurse-to-patient ratio law set to take effect early next year in California, home to the majority of CHW's hospitals. Under that landmark legislation, signed into law in 1999, hospitals will be required to have each nurse care for only a certain number of patients.
California's Department of Health Services has yet to determine the exact ratios it will implement as a bitter dispute rages between the state's hospitals and its nurses.
The California Healthcare Association has proposed a ratio of one nurse to every 10 patients in medical/surgical units, and the California Nurses Association, one of the nation's most aggressive nurses' lobbies, has proposed a much tougher ratio of one nurse to every three patients in those units.