The only public hospital in Buffalo, N.Y., bought a piece of its independence from the county last January, following in the footsteps of several hospitals around the state that in recent years have tried the same thing with less-than-impressive results.
But the architects of the plan--which spun off 1,200-bed Erie County Medical Center as a so-called public-benefit corporation--believe they have solved the tricky puzzle. The investment bankers behind the deal say it could serve as a national model for other public hospitals that are looking for creative ways to improve their financial situation.
"From our perspective, the (Erie County) spinoff is the tip of the iceberg, given the fiscal challenges facing municipal governments across the country," says David Cyganowski, managing director and co-head of Citigroup's healthcare unit.
Still, the hospital got off to a less-than-auspicious start last month when Roger Kaiser Jr., its chief executive officer since 2002, stepped down in "a mutual agreement" with the hospital's board. Kaiser, an anesthesiologist, had been associated with the hospital for 21 years. To fill his place on an interim basis while a national search is launched, the board appointed Joseph Zizzi, a cardiologist who has been associated with the hospital for more than 30 years and previously had been called upon to temporarily run the hospital in 1980 and again in 1984.
As a public-benefit corporation, a concept organized under New York's public authorities law, Erie County now has the flexibility to partner with for-profit or not-for-profit businesses, an opportunity it never had as a county-owned hospital, says Anthony Colucci III, a lawyer in private practice who represented the hospital. The prospect of competing with other Buffalo hospitals on a more level playing field drove the conversion. For the privilege, the hospital paid $85 million for the hospital's assets, including the building. The hospital is leasing the land it occupies--65 acres in the middle of Buffalo.
Citigroup helped secure a bridge loan on Jan. 28 to complete the sale, and there will be a bond financing to retire that loan. The financing, which will likely be for $100 million to cover interest and closing costs, was delayed by the timing of some audited financial statements, says Neal Fatin, Erie County's executive director of strategic planning. But the bonds should be priced by the end of July at the latest, he adds. The county will guarantee the bonds, which will be insured. Since the county assumed all of the hospital's debt and liabilities--about $26 million--the hospital started its new life with a clean slate other than the financing of the purchase price, Colucci says.
As a public-benefit corporation--a kind of hybrid of a not-for-profit combined with a publicly owned hospital--Erie County is governed by a board of 15 trustees, eight of whom were appointed by the governor. There are a variety of such corporations throughout the state, all with their unique attributes, but only five in recent years, including Erie County, have been related to healthcare.
The four others are 101-bed Roswell Park Cancer Institute, also in Buffalo; 20-bed Clifton-Fine Hospital in Star Lake; 481-bed Nassau University Medical Center in East Meadow; and 910-bed Westchester Medical Center in Valhalla. Mammoth 11-hospital New York City Health and Hospitals Corp., or HHC, the largest public hospital system in the country, is credited with being one of the first if not the first hospital nationwide to convert to a public-benefit corporation--in 1970.
"HHC is a success story," says Kenneth Raske, president of the Greater New York Hospital Association. "This leads everybody to euphoria for making a conversion."
Each public-benefit corporation has its own peculiarities because of the facility-specific enabling legislation that established them. The governance and funding structures vary, but in general it gives the hospitals more flexibility to compete with private, not-for-profit hospitals, says Alan Aviles, senior vice president and general counsel for HHC.
"But it's not a substitute for strong, experienced management and it's not going to help in the transition if a new entity is saddled with a lot of debt or has to forgo a tax levy or subsidy," Aviles adds.
Elsewhere in the country, public hospitals with legally separate governing boards that are one step or more removed from direct control by a city, county or state government have taken hold. Though no one has tracked the number of conversions throughout the country, the National Association of Public Hospitals and Health Systems counts 26 member hospitals that are separate public entities versus 24 that are directly operated by local or state governments.
Conversion may be a crucial move for some hospitals to dig themselves out of the quagmire of local bureaucracies, but it's not a panacea, cautions Anne Camper, corporate counsel for the public hospital association and a partner at Powell, Goldstein, Frazer and Murphy in Washington.
"Changing the governance structure is one of the tools a public hospital has to try to improve its situation," Camper says. "What we are seeing as there are more uninsured and reimbursement has dried up--particularly for safety net hospitals--is that (public hospitals) are doing what they can do to try to improve their overall financial situation and ability to govern. ... But changing their governance by itself won't perform any miracles. It improves their tool chest."
The track record for such conversions as established by Nassau and Westchester has been underwhelming at best. Both hospitals are straining financially and, like Erie County, have been plagued by leadership changes in recent months that seem to have left them rudderless.
Losses and management changes
Westchester, which converted in 1998, has been buried under two years' worth of heavy operating losses. The credit-rating companies said the hospital probably would not survive without outside help (Jan. 19, p. 22). Meanwhile, Westchester President and CEO Edward Stolzenberg retired Jan. 15. The previous week, Marilyn Slaatten, senior executive vice president and chief administrative officer, decided to resign, effective in the spring. John Spicer, a member of the board of Westchester County Health Care Corp., the facility's parent, and president and CEO of 403-bed Sound Shore Medical Center, New Rochelle, is serving as interim CEO. Mary Brown, of the turnaround firm Pitts Management Associates, has been working under a consulting contract at the hospital for an unspecified time, says Joe Pisani, Westchester's senior executive vice president and chief administrative officer.
For 2003, Westchester is projecting a loss as high as $90 million, Pisani says. The facility's financial problems stem from a variety of factors, including the "difficult environment" for New York healthcare providers, he says. Pension costs have skyrocketed to $27 million from $4 million a few years ago. There are also issues related to malpractice insurance, he says. The county's only obligation six years after the conversion is to guarantee the debt. The county also supplies the utilities and is patient about collecting payments from the hospital, about $10 million per year, he adds.
Last week, Westchester unveiled a $75 million financial improvement plan that will seek $28 million in new revenue and $47 million in expense reductions. The plan includes the elimination of 115 full-time positions; 42? of those positions are nursing jobs, though not bedside nurses. The plan aims for breaking even on operations by 2006.
Pisani says it's premature to blame the troubles on the conversion, which, like Erie County, was apparently driven by the desire "to have stronger relationships with other hospital systems." Westchester has since joined Pinnacle Healthcare, a five-hospital, not-for-profit network in Westchester County.
"When you think about it, you have separation issues when any organization goes out on its own," Pisani says. "Obviously, we are experiencing separation pains."
At Nassau, which converted in 1999, the idea was to distance the medical center from the bureaucracy of local government, said Richard Turan, just one week before he resigned last month (June 7, p. 18). Turan stepped down after 3? tumultuous years as president and CEO of the corporation, barely two months after he and six other executives at Nassau settled charges with a state ethics commission that they took illegal gifts and reimbursements from vendors. Turan argued that the gifts would be considered standard business practice in the private sector.
"The whole idea was it is very, very difficult to operate any entity, particularly a hospital, if you have all the problems of government--from purchasing to civil service--and on top of it you have the politics," Turan said before his resignation. Though he said there was no financial bene-fit to converting--the county had withdrawn nearly all of its financial support--the hospital has "substantially improved the quality of care" and efficiency as a public-benefit corporation. A $42 million deficit in 2001 had been whittled down to $14.5 million in 2003 and the corporation would have shown a profit on revenue of approximately $500 million in 2004 were it not for sky-rocketing state pension costs. As it stands, the hospital is expected to lose $15 million this year.
"If we had remained a county hospital, the county would have to make up" the budget deficit, Turan said. "It's a management benefit that hopefully frees us of bureaucracy--but not enough of the bureaucracy to make it work. There is still too much government bureaucracy and intrusion (into) what we do."
In contrast to Westchester and Nassau, New York's public hospital system has grown very comfortable in the skin of a public-benefit corporation. HHC's Aviles says the corporation grew out of "the sense that running this large municipal hospital system really required more managerial flexibility and agility than seemed possible for an organization that was simply a subcomponent of a much bigger bureaucracy and would still allow the public to maintain a reasonable degree of accountability."
A low point
The city's financial support--a promise that it would always be at least enough to address HHC's mission of providing care to the medically indigent--probably reached its low point during the administration of Mayor Rudolph Giuliani, from 1994 to 2001, when HHC was pressed to be as efficient as possible, Aviles says. But even then the city was picking up the corporation's debt service and paying for malpractice insurance. Under the current administration of Mayor Michael Bloomberg, the city's support has increased by about $200 million, he adds. In the fiscal year ended June 30, 2003, HHC's operations lost $251 million on $4.2 billion in revenue.
"It's definitely been a good thing," Aviles says of the conversion. "We're more competitive to respond more quickly to the changes in the healthcare market. It's certainly allowed us some flexibility in our salary scale. We're not that close to competing with (not-for-profit) hospitals, but at the most senior levels we can offer salaries 20% to 25% higher than if we were a city agency, and it has allowed us to streamline our administrative processes."
The problems of the public-benefit corporations in New York are due to the "length of the umbilical cord" rather than an inherent problem with the concept, which is "generally a good thing," says the GNYHA's Raske. "Everything we've seen so far shows that the government needs to be present on a transition phase for multiple years. They can't wash their hands of it," he says.
Fatin of Erie County says the corporation has been carefully structured financially to avoid the kind of funding problems that plague Westchester and Nassau, while the leadership vacuum is just temporary.
"They bought a car; we bought a car. That doesn't mean (the cars) will end up in the same shape," Fatin says. "We have the advantage of seeing some things they did."
As a so-called enterprise fund of the county before the conversion, the Erie County center enjoyed a degree of flexibility in how it spent its budgeted dollars, he says. Under the new arrangement, the county has pledged its ongoing support that at the bare minimum will equal the principal and interest on its bonds. "This will allow us to pursue joint ventures that we couldn't have if we did nothing," Fatin says. "With it, it is no worse than what it was before. We have opportunities we didn't have before. (Converting) could make it better, but there is nothing that makes it worse."
In the past three years through 2003, the county forked over $19.7 million, $15.7 million and $23.3 million (unaudited), respectively, according to the corporation. For the same three years, the hospital recorded surpluses of $1.4 million, $2.6 million and $900,000, respectively.
Conceding that Erie County has seen "a bit of turmoil" in the past couple of months, Fatin says the management problems have taken the focus off improving the financial performance of the hospital but only temporarily. Considering the conversion was about 10 years in the making, it's difficult to get serious with partners when the situation is so fluid, he says. But Fatin expects that will change once the other issues calm down.
Focus on retraining
"We consider our ultimate customers our patients, but the doctors are the ones who bring patients to the hospital," Fatin says. "So our first focus is going to be retaining and attracting high-quality personnel. This concept will allow us to joint venture with physician groups and other healthcare providers so we can operate more like an entrepreneurial business." Looking across the border to some untapped opportunities in Canada and considering that 30% of Buffalo's high-end cases go to Cleveland, Pittsburgh or Rochester, N.Y., there is plenty of business to "recapture" without worrying about competing with other Buffalo hospitals, he adds.
In these ways, pure-bred public hospitals are "fading away" as local governments across the country increasingly struggle to get out of the hospital business, says Richard Wade, a spokesman for the American Hospital Association. Similarly, Michael Irwin, a managing director in the healthcare group at Citigroup, says that while unique, the Erie County deal "is indicative of a recognition on the part of governmental units that have healthcare enterprises that they have to be more creative in how they approach it. They have to rely on a professional management team with accountability to improve the financial performance in an increasingly competitive environment."
Camper says the critical need to maintain a level of financial support is driving an even newer trend--conversion of public hospitals into taxing districts. Counties are now gingerly turning to voters in efforts to support their financially ailing public hospitals (March 1, p. 17). Last November, supervisors in Maricopa County, Ariz., secured voter approval for a property tax increase to infuse as much as $40 million a year into Maricopa Integrated Health System, Phoenix. In March, Alameda County, Calif., voters approved a half-cent sales tax increase to prop up three-hospital Alameda County Medical Center in Oakland. Three-fourths of the $90 million that will be generated annually by the tax for 15 years will support the public system (March 8, p. 4).
And earlier this month, voters in west Contra Costa County, Calif., overwhelmingly approved a $52 annual parcel tax to help ensure the survival of Doctors Medical Center, San Pablo, which runs the county's only full-service emergency room. The property tax is expected to raise $6.1 million a year to offset the 131-bed hospital's operating costs. A similar measure was approved in Los Angeles County in 2002.
"Even five years ago, the notion of creating a new taxing entity was anathema in any locale," Camper says.
Aviles says converting to a public-benefit corporation is a highly complex endeavor that should not be undertaken lightly--anywhere in the country. Public hospitals that are addicted to reliable reimbursement have to learn "to adjust to a rapidly changing reimbursement market," he says.
"It's hard to make the culture changes. It's hard to right-size an organization that may have become somewhat bloated over the years and to assert complete managerial control," Aviles says. "When you have clinical heads of departments that tend to be balkanized or focused on areas rather then the overall institution, it can make it difficult to implement the necessary changes. That's a challenge that converting also exacerbates rather than helps."
Still, given everything, both Pisani of Westchester and Turan of Nassau say they would probably choose the same route again. "I think healthcare is completely different from other county government roles. I think the prudent thing is to divide healthcare activity from government activity. That's my opinion," Pisani says.
Said Turan just before his resignation: "Yes, (I would do it again) but with some changes. I think this is a better hospital. Patient care has improved. We're not better off financially, but the public is better off financially. However, an unfair burden has shifted from the county to the hospital."
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