Hospital bankruptcy stories are always poignant, peopled with doctors, nurses, patients and bondholders left in the lurch. But bankruptcies and the ensuing reorganizations usually include a glimmer of hope for rebirth, reformation or redemption. In that regard, 154-bed Pascack Valley Hospital in Westwood, N.J., is still waiting.
By all accounts a beautiful, up-to-date facility on a sprawling 20-acre campus in Bergen County, it is slated to close at the end of this month after a futile, yearlong search for a strategic partner.
Hospital officials announced in late September that they planned to file a petition under Chapter 11 and then focus on a safe and orderly closure of the hospital. Interim Chief Financial Officer Leonard Weil, who came onboard one year ago when Pascack Valleys future was already looking dim, says the reorganization made sense since the hospital could not immediately shutter its doors. After it closes on Nov. 21, the bankruptcy likely will be converted to Chapter 7 for liquidation, he says.
How did Pascack Valley, which has been operating since 1959, get to this point? Depending on who is asked, it was some part hubris and some part random bad luck, although the common denominator in most discussions is the fiercely competitive northern New Jersey marketplace.
I think Pascack Valley is a credit where it was a long, slow slide, says Charlene Butterfield, an associate director at Standard & Poors. I dont think any of this was an overnight issue.
The hospital is reporting assets of $111 million and liabilities of $126.9 million, including $80 million of bond debt, according to Weil. In announcing the bankruptcy decision, hospital officials reported that the hospital had lost more than $50 million over the past four years, including this year. In 2006, the operating loss was $21.9 million and is projected to top $16 million this year.
The beginning of the end for Pascack Valley appears to coincide with a decision to shoulder new debt in 2003. The $51.4 million bond issue financed construction of a four-story tower that added 122,000 square feet of capacity and focused on the expansion and renovation of obstetrics and emergency services, according to an S&P ratings report at the time. The debt was rated just below investment grade at BB+ with a stable outlook. In the report, S&P said that although the current expansion and renovation project is necessary for PVH to remain attractive to patients, the hospital has minimal financial flexibility to absorb the additional cost and leverage associated with the proposed debt.
Ann Twomey, president of the 11,000-member Health Professionals and Allied Employees union in New Jersey, complains that, no different from other hospitals in the state, Pascack Valleys finances were never transparent, and its fiscal problem didnt become publicly known until it was already too late. Shouldnt it be the role of the (New Jersey) Department of Health to look into the financial condition of an institution and whether it can handle (debt) or if it is truly advisable in this case? she asks rhetorically.
Once the finances became known, the union made concessions in salaries, overtime pay, health insurance copayments and other contract changes that saved approximately $3.8 million. The year before, employees agreed to a two-year pension plan freeze and a reduction in benefits when the plan resumed, which provided about $5 million in savings, according to Twomey.
The biggest impediment standing between Pascack Valley and a financial white knight is its debt load: No one wants to assume it, says Gary Carter, president and chief executive officer of the New Jersey Hospital Association. They built a beautiful tower with the expectation that volume would continue, but so much of the volume shifted to outpatient and ambulatory centers, he says.
Although it is unclear what exactly precipitated it, a dispute between physicians and the administration also hampered the hospital, and eventually forced the retirement of Louis Ycre Jr. in 2004 after 23 years as president and CEO. Physician referralsthe lifeblood of any hospitalsubsequently diminished, observers say. Also, Pascack Valley, like a disproportionately large number of New Jersey hospitals, relied heavily on Medicare outlier payments before that payment system was reformedsubsequently losing about $12 million a year, according to Butterfield. Partly because of that change, S&P in 2004 lowered its rating for Pascack Valley three notches to B+ with a negative outlook, noting the hospital had ended 2003 with an $11.2 million operating loss.
Weil says a multitude of factors led to the financial collapse, not just the new debt. As a stand-alone hospital, Pascack Valley was at a decided disadvantage in negotiating rates with managed-care plans, he says. When he first came onboard as interim CFO, the hospital cut expenses by $10 million with the help of Deloitte Consulting, but revenue continued to decline. Ambulatory surgery volume fell as more patients moved to competing ambulatory surgery centers, he says. In 2006, expenses peaked at $150.9 million on $129.1 million in revenue, attributable to a number of reasons, including, ironically, the cost of retaining consultants to turn the hospital around and help find a strategic partner, Weil says.
In that latter regard, Pascack Valley reached out to both not-for-profit hospitals in the area and for-profit companies, and received some lukewarm interest, Weil says. Only one hospital, 661-bed Hackensack (N.J.) University Medical Center, got as far as the due-diligence phase.
In February of this year, the two hospitals announced they were extending a three-month memorandum of understanding regarding a potential affiliation for another month. In a transaction of this size, there are many details that need to be considered, officials said in a news release at the time. One month later in a joint announcement, Hackensack President and CEO John Ferguson and Pascack Valley President and CEO Sidney Mitchell said talks were continuing, and they had every confidence that they will result in an agreement in the near future.
In April, Mitchell announced his resignation after a little more than two years with Pascack Valley. My specific expertise is and always has been in working with hospitals in developing and implementing their strategic plans, Mitchell said in a news release. Accordingly, given the current merger and strategic partner environment the hospital is now in, I feel that I could be more effective in another institution. That was the last mention of affiliation discussions until September, when Pascack Valley announced its bankruptcy filing. Hackensack officials did not respond to a request for an interview.
I think the bottom line is there wasnt the need for five full-fledged hospitals in this county, Weil says.
Michael Maron, president and CEO of nearby competitor 318-bed Holy Name Hospital in Teaneck, N.J., says he believes Pascack Valley is so far gone, it would be impossible to get a partner. But he also says he doesnt buy the argument that poor management decisions, specifically the decision to take on more debt to build the patient tower, drove them to financial ruin. Thats not the case. They had debt like everyone else.
On the contrary, Pascack Valley was a well-run, low-cost, good-quality hospital with physicians who practiced everywhere else, Maron says. He traces it all to area hospitals aggressive battle over physicians. When bigger hospitals stole away physicians, they gained volume at Pascack Valleys expense, he says.
Were in an economic environment that rewards growth or allows growth to keep you afloat, Maron says. The problem with that scenario is that if you project out, the population in Bergen County and New Jersey is stagnant and shrinking. What happens now when there is no market share to steal and they stop growing? Its a house of cards.