Can this newcomer to the hospital biz stop the bleeding at Chicago's Mercy?

The sale of Mercy Hospital & Medical Center entrusts one of Chicago's most vulnerable hospitals to a Michigan biotechnology firm with no experience running a full-service hospital.

Insight Chicago paid $1 to buy struggling Mercy from Catholic hospital chain Trinity Health. The newly formed nonprofit entity is owned by neurosurgeon Dr. Jawad Shah, 54, who also runs the Insight Institute of Neurosurgery & Neuroscience, which operates outpatient programs and a 20-bed surgical hospital in Michigan.

With 412 beds on Chicago's South Side, Mercy presents challenges that Insight hasn't faced in its home state. The hospital serves large numbers of low-income patients on Medicaid, which pays hospitals far less than private insurers.

Trinity has said the hospital was generating monthly operating losses of $4 million and that the aging facility would require at least $100 million of capital investments in the next five years "to maintain a safe and sustainable acute care environment." Trinity sought approval to close Mercy just as Insight stepped up.

With the acquisition, Insight took responsibility for Mercy's survival—and the continued availability of important health care services in the community it serves. Promising to invest $50 million in Mercy within the next two years, Shah expressed confidence in his ability to stabilize the hospital's finances.

"Having a fresh set of eyes, we definitely would do a few things a little bit differently (than Trinity) in terms of how to run the operational side, as well as the facility, to make it as efficient as we possibly can," Shah says.

To run Mercy, now called Insight Hospital & Medical Center, he appointed Atif Bawahab, who doesn't have experience running a full-service, acute care hospital. In addition to that role, Bawahab, 33, will continue serving as the parent company's chief strategy officer and CEO of its surgical hospital near Detroit.

Bawahab doesn't have the "experience you would expect to do a big turnaround in a place like Mercy," says Tim Classen, an associate professor of economics at Loyola University Chicago's Quinlan School of Business. "Health care needs new ideas, new inspirations, new innovations and new leadership strategies. But that's a big stretch to come into a facility that's been struggling so hard and make it profitable."

Bawahab says he's feeling the pressure, but not because of his age or experience. "There's a lot to do in terms of stabilizing (the hospital), but we really do see this as a tremendous opportunity just to show what we can provide to this community," he says.

For now, Insight is focused on identifying opportunities to beef up lucrative service lines that can help prop up critical, money-losing departments like the emergency room, as well as labor and delivery.

Take a service line like stroke, for example, Shah says: "On one hand it helps the community tremendously. At the same time it's very beneficial for the hospital financially. When you see these sorts of alignments and opportunities to implement them, you can see why we're confident the hospital will do well."

Attracting privately insured patients for profitable surgeries will be difficult for Mercy, which competes with nearby top-ranked academic hospitals, including University of Chicago Medical Center, Northwestern Memorial Hospital, and Rush University Medical Center. Even clinics in Mercy's neighborhood have affiliations with larger hospitals, which will make it hard to get referrals for the lucrative procedures that Shah hopes will keep the hospital afloat.

"They're not just going to change the payer mix," Classen says. "It has to be that they're doing certain procedures in the city that are attractive to private payers like Blue Cross, to attract the patient volumes into those higher margin services."

Negotiating with vendors is one area where Shah says he sees a big opportunity for savings.

"There's tremendous waste in hospitals," Shah says, referencing a time that Insight negotiated a $27,000 discount on a device used in spinal fusion procedures at its Michigan hospital.

Still, as part of nearly $19 billion-revenue Trinity, a Livonia, Mich.-based chain that also owns three-hospital Loyola Medicine across town, Mercy already had access to deep financial resources and economies of scale.

The hospital posted net income of $4 million in fiscal 2020, compared with a net loss of $36 million a year earlier, according to Trinity's financial filings. Trinity invested just $6.9 million into the hospital in 2019, according to the latest state data.

Smaller hospitals tend to make more aggressive operating decisions than large nonprofit systems around medical coding to get higher reimbursements from payers, for example, says Jordan Shields, managing director at Chicago-based investment banking firm Juniper Advisory.

"You should expect that (a large health system is) going to make different decisions than an organization that is small, very agile, new to acute care—and that nobody has ever heard of, so there's no reputational risk," Shields says. "It's going to be (easier) for Insight to make hard-nosed financial decisions than it was for Trinity."

To operate as a nonprofit, the Chicago hospital sits under Shah's Firdaus Foundation, an Islamic charitable organization he launched nearly a decade ago. Firdaus, which means paradise in Arabic, aims to "make sure that good work is housed and protected in a way that it can last longer than anyone's life," Shah says.

In addition to his medical practice, Shah's revenue-generating businesses include leasing space at his biomedical technology campus, renting out the Insight & Conference Center auditorium and offering management and consulting services. The company also houses a health startup incubator with two portfolio companies, one of which is run by his 19-year-old daughter.

Shah has a 5 percent ownership stake in private equity-backed Pontiac General Hospital, which in 2016 came under fire for accepting a $400,000 payment in exchange for a residency program slot. An Insight representative says in a statement that Shah now has "zero involvement" with the facility and that his "past involvement was very limited and he was not involved in any alleged wrongdoing as it pertains to EEOC complaints against Pontiac General executive leadership."

While Insight is very aggressive when it comes to growth, Shah says the firm doesn't carry any debt.

"I don't want to risk other peoples' money," Shah says. "For me, if the only one I'm hurting is myself, then it's easy to take risks."