As if merging two prominent, egocentric New York teaching hospitals was not difficult enough, Mount Sinai NYU Health is fighting the public perception that, like others before it, this great experiment in academic medicine has failed and the two hospitals have divorced.
Even recent news reports are picking up the rumors that say the only glue holding the 1998 merger together is roughly $700 million of consolidated debt. Compounding the messy relationship is a rash of negative outlooks and downgrades from the three major rating agencies, brought on primarily by 986-bed Mount Sinai Hospital's dismal operating performance and concern that the merger is unraveling. To make matters worse, one more downgrade by even a notch could cost the system millions more in interest per year.
The saga of the struggle to unite four hospitals and two medical schools into one happy, economically sound culture reads like the story of other teaching hospital mergers that have gone awry-most notably UCSF-Stanford Health System in California and Penn State Geisinger Health System in Pennsylvania (May 29, 2000, p. 24). But there's a twist. The partners insist they want to stay married-they just can't live together.
"We're not demerging," insisted Gary Rosenberg, senior vice president of Mount Sinai, whose public affairs and marketing office was disjoined from 718-bed NYU Hospital Centers.
The merger created a 128-member parent board with each hospital equally represented; Mount Sinai President and Chief Executive Officer John Rowe, M.D., headed the board. Two years later, Rowe moved on to an even more prominent position as head of the nation's largest health insurer, Aetna.
The problems became public last summer when the partners began decentralizing their boards and realigning each hospital with its respective medical school, where philanthropists' loyalties seemed to lie (May 21, p. 24). As a result, Mount Sinai had its best philanthropy year ever as it nears the $100 million mark, Rosenberg said.
"Certainly the perspective of leadership at NYU is that the merger is not dead," said Lynn Odell, a spokeswoman for NYU. "Yes, the structure has changed, but there are still many projects that all our institutions benefit from. People believe the merger is dead, and that's just not the case."
Although Mount Sinai seemed to to be the stronger when the two united, common thought is that it's now dragging down NYU. Mount Sinai's money-losing operations resulted in low levels of cash at the end of 2000-a concern for the rating agencies. In 2000, Mount Sinai lost $26.4 million on $979 million in operating revenue-a 2.6% loss, said Liz Sweeney, a director at Standard & Poor's. During the same period, NYU earned $22.7 million on operating revenue of $509 million-a 4.7% margin. Mount Sinai steadied itself with a 0.8% profit margin through philanthropy and investment income, Sweeney said.
The obligated group, which includes the two major hospitals, still musters a midgrade B-level rating, a couple of notches above junk-grade. But any downgrade could prove costly. When the debt was financed in April 2000, $180 million of the $680 million was issued in auction securities and, thus, at a flexible rate, said James Andrews, vice president of Goldman, Sachs and Co., the system's banker. A provision was that if the rating reached the BBB- or Baa3 level, it would have to be refinanced at a fixed rate. If that happens, the variable rate, now at 5.34%, could go as high as 7.5%. That could cost the system more than $3 million per year, he said.
In the nine months ended Sept. 30, 2001, the obligated group lost $50.7 million on revenue of $1.2 billion, Sweeney said. Those results were worse than what S&P had expected.
"We'll be watching the quarterly numbers carefully, and they will need to show improvement over the fourth and first quarter to avoid a lower rating," Sweeney said.
To improve operations, Mount Sinai last year brought in turnaround specialist the Hunter Group, Rosenberg said. The consultants are examining hospital operations and the medical school-strictly at Mount Sinai-and "they will leave us with a plan and we'll decide how much to implement," Rosenberg said, adding that layoffs are a possibility.
"I think we are going to be fine," Rosenberg said. "Our financials are on target. If the ratings go down, it's always costly, but I don't expect it is going to go down."
Meanwhile, NYU in October appointed its own CEO and dean, Robert Glickman, M.D., and Mount Sinai is doing the same, although it is unclear if one person will hold both titles. Clinical services haven't merged as once envisioned, but the two hospitals are still doing "a number of things together," Rosenberg said. Besides consolidating their debt, they have a single information technology platform, they purchase both supplies and employee benefits together and they negotiate reimbursement rates together. They also share best practices and collaborate on some research, Rosenberg said.