A financially troubled Ohio hospital is hoping Chapter 11 bankruptcy protection will save it for the second time in four years. Cleveland's only for-profit hospital, 212-bed Deaconess Hospital, filed for Chapter 11 protection from creditors in U.S. Bankruptcy Court in Cleveland late last month after defaulting on outstanding loans. The hospital owes $3.3 million to Heller Healthcare Finance, $5.5 million to Bank One Corp. and $5.4 million to other creditors, including local utilities.
The 84-year-old hospital employs 400 people. In 2000, vascular surgeon and real estate entrepreneur George Saad and his management company, Nour Management, bought the hospital for $5 million at a court-ordered bankruptcy auction from Primary Health Systems. Primary, which had purchased Deaconess for $8 million in 1994, filed for bankruptcy protection in 1999.
Bill Ryan, president and chief executive officer of the Center for Health Affairs, Cleveland's regional hospital association, said Deaconess is like many urban hospitals experiencing financial difficulties in competitive markets. Ryan said Saad is the fourth operator to attempt to succeed at Deaconess. He said the hospital is challenged by patient and payer mix and is located in an older community served by aging physicians. He said Deaconess has failed to make capital and equipment improvements in the highly sophisticated Cleveland market, which is dominated by the not-for-profit Cleveland Clinic and University Hospitals Health System. He said Deaconess has had trouble attracting commercial payers and relies heavily on Medicare and Medicaid reimbursements.
"As the hospital struggled to sustain itself, it went with an industrial approach to cut costs. It lost key employees and ended up having to pay even more for staff," he said. "We've heard as much as 70% of their nursing staff came out of agencies. You pay a premium for that. Plus the lack of a consistent nursing staff freaks out surgeons, who stop scheduling there." He said physicians left as unpaid vendors put the hospital on a cash-only payment basis.
Six months ago the city brokered a deal that allowed Deaconess, which had threatened to close, some relief in its utility payments.
"Everyone's surprised it's stayed open this long," Ryan said.
The hospital also relied on accounts receivable financing from Heller, paying a high price to maintain its cash flow.
Saad vowed to keep the hospital open and said the voluntary filing was undertaken to restructure debt. "The filing was made so that we can continue our important missions: to serve our patients and the community," Saad said in a news release. "The hospital is making every attempt to obtain court protection for our employees' salaries and benefits. The goal is to emerge from Chapter 11 with renewed strength and commitment to our constituents."
He blamed poor reimbursement and skyrocketing medical malpractice insurance costs for the hospital's poor financial condition. At the time of the bankruptcy filing, the hospital listed assets of $15 million and liabilities of $14.3 million. The hospital refused to provide more detailed financial information. "By proactively addressing these issues, and by recapitalizing our hospital, we will be able to focus the talents of our physicians, staff and employees on our delivery of healthcare services," said Saad, who did not return calls for comment last week.
The hospital appeared close to shutting its doors in 2000 when community rallies, local physicians and employees and a push by U.S. Rep. Dennis Kucinich (D-Ohio) helped keep it and another struggling Cleveland hospital, St. Michael Hospital, open. Both were subsequently sold to local owners.
Earlier this year, University Hospitals, which owns St. Michael and eight other hospitals, announced it would close St. Michael Dec. 19, citing an anticipated loss of $8 million. The system purchased the hospital and Mount Sinai-East Medical Center in Richmond Heights for $12 million from Primary in 2000.