New York state's largest ever hospital bankruptcy filing, made last week by St. Vincent Catholic Medical Centers, rippled through New York City, unsettling an already tenuous economic environment for hospitals.
"My fear is that New York City is extraordinarily fragile and that creditors who have been nervous for some time will become even more nervous," said David Speltz, president and chief executive officer of St. Vincent, the state's largest Roman Catholic healthcare system. "They'll move in on other hospitals as they moved in on us, creating a crisis within the city."
The now seven-hospital system, which closed one hospital last year and is closing two more, is seeking protection in U.S. Bankruptcy Court in New York from $1.1 billion in liabilities against $971 million in assets while it reorganizes under Chapter 11. Speltz said the filing would give the system breathing space to restructure its operations and finances while it continues normal operations unfettered by crushing debt.
"The only way to do that is in a timeout with the court and with a judge as mediator," he said.
Speltz said there are no immediate plans to close other hospitals in the system, "But we are clearly viewing all of our services throughout New York."
Speltz and his partner Timothy Weis, who serves as St. Vincent's chief financial officer, have led the turnaround effort at St. Vincent since January 2004. The two navigated 403-bed Crouse Hospital in Syracuse, N.Y., out of two years of bankruptcy protection in 2003. Their consulting firm, Speltz & Weis, was recently acquired by Huron Consulting Group for $17 million (May 16, p. 17).
The bankruptcy arrives as a newly formed state healthcare commission begins to scrutinize the over-bedded market and target hospitals that are ripe for closing. To help the commission do its work, hospitals and Local 1199 of the Service Employees International Union lobbied for $1 billion from the state budget and bond issues in part to aid hospitals' restructuring efforts, said Kenneth Raske, president and CEO of the Greater New York Hospital Association.
"When you look (at the commission) in relation to St. Vincent, it calls out the need to do what we did--that is prepare ourselves for some very difficult times," Raske said.
Nevertheless, Raske said he did not think the St. Vincent bankruptcy would create a domino effect of more bankruptcies, "but it's indicative of the economic paralysis" that is gripping hospitals around the state. "Costs are going through the roof and payments through the floor," Raske said.
St. Vincent's yearlong effort to stanch operating losses was blindsided by the realization that there had been a $60 million overstatement of revenue in 2003 that even the auditors had missed, Speltz said. Accountants failed to reflect all of the discounts given to the many managed-care organizations that do business with St. Vincent, and not all of the system's $104 million in charity care that year had been properly booked, he said. Speltz said a new turnaround plan was submitted to the board in June "but to many, that was the straw that broke the camel's back." The system finished 2004 with a $143 million operating loss on $1.6 billion in revenue.
Moreover, St. Vincent executives acknowledged from the beginning of the turnaround effort that the plan could not "address the debt issue, which had to be addressed in a refinancing or an alternative," Speltz said.
Approximately $320 million of the system's $1.1 billion in debt is secured, with approximately $200 million of that amount backed by federally insured mortgages through the U.S. Housing and Urban Development Department, Weis said. The system owes $250 million to vendors and another $160 million for malpractice liability, he said. Computer Sciences Corp., the system's information technology contractor, holds the largest unsecured claim with more than $12 million owed, according to papers filed with the court. St. Vincent also owes approximately $5.2 million to Local 1199's pension and benefits funds. Approximately 9,500 of the system's 11,500 employees are SEIU members, said a St. Vincent spokesman.
The union said in a statement that it is "deeply troubled" by the bankruptcy filing "and will work aggressively to insure that the network's obligations to its employees are fully honored." Union officials previously worked with St. Vincent management to secure temporary state financing, and the union will continue to work with St. Vincent "in any way we can to preserve quality healthcare at these facilities," according to the statement.
Ironically, bankers are now calling St. Vincent, offering loans, Speltz said. "They believe by the time we emerge we will be a very good credit," he said.
Speltz, who estimated that the reorganization will take 18 to 24 months, said he thought the state commission's efforts to reduce the number of unneeded beds and "rationalize the system" is crucial, but the process needs to be accelerated to free dying hospitals from their burdensome debt.
St. Vincent's bankruptcy filing came less than a week after 251-bed, for-profit Parkway Hospital, New York, also filed for relief from creditors, reporting assets of $29 million against liabilities of $29 million. Officials said Parkway will remain open and continue providing services during the reorganization. The hospital is working to obtain approximately $15 million in financing to fund operations during the bankruptcy process, officials said in a news release.