Blue Mountain Capital Management, the private equity firm that took over Daughters of Charity Health System last year, has its work cut out for it to turnaround the struggling hospital group.
A financial report filed late last week shows that Daughters, now known as Verity Health System after the Dec. 14 deal closing, continued to face operating challenges during the six months it waited for the agreement to be finalized.
Its struggles include attracting more patients in the competitive Bay Area and negotiating higher rates from insurers.
Verity's revenue took a hit after it saw sharp drops in patient volume in certain service lines during the first six months of its fiscal year, which began July 1.
While the overall number of discharges stayed the same, inpatient surgeries decreased 10.5%, outpatient surgeries fell 13.7% and deliveries decreased 19.2% year over year.
When adjusted for outpatient activity, discharges declined 3.3% in the six-month period. Emergency department visits were down 3%.
The six-hospital, Redwood City, Calif.-based system also took a hit from an adverse payer mix and reimbursement rate increases that were below historical levels, according to the earnings report.
Verity also had a tough year-over-year comparison because it benefited in fiscal 2015 from the return of California's provider fee program, which had been on hold while waiting for the CMS to approve its extension. It recorded back payments from the program that provided a one-time boost.
On the expense side, Verity cut salaries by $23 million but incurred $25 million in costs related to the takeover transaction. It also booked lower expenses related to the provider fee program.
In total, Verity reported an operating loss of $70.7 million on $662.2 million in total revenue for the six-month period ended Dec. 31, compared with an operating loss of $35.2 million on $749.9 million in revenue during fiscal 2015.
Its operating margin in the period declined to a negative 10.7%, down from negative 4.7% the previous year.
Yet the earnings report said Verity's financial performance was favorable to budget.
The system recorded $3 million in investment earnings in the period compared to $2 million in the prior-year period. And after flirting with bankruptcy, Verity had 48.9 days of cash on hand on Dec. 31 compared with 12.4 days on Dec. 31, 2014.
Under the deal, New York-based Blue Mountain created a new entity known as Integrity Healthcare to manage the system. It also committed $100 million in exchange for the lease on Verity's information technology assets and the option to buy the system within three to 15 years.
The deal terms also included a line of credit of at least $150 million to pay down Verity's debt and the attorney general's approval required $180 million to be used for capital expenditures.
Blue Mountain must also maintain essential services for 10 years and preserve jobs for Verity's 7,000 employees.