Hid­den cost of cap­i­tal ac­cess

Cash in­fu­sion can mean sur­vival for a hos­pi­tal, but also loss of in­de­pen­dence

Modern Healthcare - - Front Page - Me­lanie Evans

When Lenox Hill Hos­pi­tal in New York City joined a larger health sys­tem last year, it did so sad­dled with debt, fi­nan­cial losses and a chronic need for cap­i­tal in­vest­ment. The 483-bed hos­pi­tal be­came the only Man­hat­tan out­post of North Shore-Long Is­land Jewish Health Sys­tem af­ter its ac­qui­si­tion. No longer solo, the hos­pi­tal gained ac­cess to cash for up­grades and other in­vest­ments that had been de­layed for years. That in­fu­sion, how­ever, also brought an end to the hos­pi­tal’s in­de­pen­dence and the abil­ity to de­cide how cap­i­tal will be spent.

“To us, from a busi­ness per­spec­tive, if we didn’t have the prin­ci­pal to in­vest in equip­ment, tech­nol­ogy and in­fra­struc­ture,” the hos­pi­tal could not hold onto or re­cruit qual­ity physi­cians, says Michael Bres­lin, who was ex­ec­u­tive vice pres­i­dent and chief fi­nan­cial of­fi­cer at Lenox Hill prior to the deal. “That even­tu­ally leads to a death spi­ral.”

As the num­ber of hos­pi­tal deals has grown, more ex­ec­u­tives, direc­tors and trustees of cap­i­tal-starved hos­pi­tals are strug­gling with a sim­i­lar trade-off be­tween cap­i­tal and con­trol. Cap­i­tal has been a notable fac­tor in re­cent deals for stand-alone hos­pi­tals and some small sys­tems. For ex­am­ple, 248-bed Com­mu­nity Med­i­cal Cen­ter, Scran­ton, Pa., re­ceived a pledge of roughly $158 mil­lion from Geisinger Health Sys­tem in an ac­qui­si­tion deal an­nounced last month.

Hos­pi­tal merger and ac­qui­si­tion ac­tiv­ity, slowed by un­cer­tainty dur­ing the de­bate ahead of the 2010 health re­form law, has since ac­cel­er­ated to reach the “fairly strong” lev­els not seen since the late 1990s, says San­ford Steever, who mon­i­tors health­care deal­mak­ing as the edi­tor of Irv­ing Levin As­so­ciates’ Health Care M&A Re­port.

From Jan­uary un­til the end of June, prospec­tive hos­pi­tal part­ners an­nounced 56 deals, and of those trans­ac­tions, 32 were an­nounced in the sec­ond quar­ter, ac­cord­ing to Irv­ing Levin re­search.

Cap­i­tal al­lo­ca­tion “al­most al­ways” fac­tors into deals made by LifePoint Hos­pi­tals, says Jeff Seraphine, pres­i­dent of LifePoint’s divi­sion that over­sees ac­qui­si­tions. LifePoint and Duke Univer­sity Health Sys­tem launched a joint ven­ture in Fe­bru­ary to ac­quire North Carolina hos­pi­tals.

As the sys­tem eval­u­ates a deal, its en­gi­neers and ex­perts in in­for­ma­tion tech­nol­ogy and fi­nance comb over prospec­tive part­ners while ex­ec­u­tives meet with an ac­qui­si­tion tar­get’s board mem­bers, physi­cians and oth­ers to re­view strate­gic goals and cap­i­tal plans, he says. LifePoint typ­i­cally makes a 10-year cap­i­tal com­mit­ment af­ter the par­ties agree on a strate­gic plan, he says.

LifePoint will com­mit sig­nif­i­cant cap­i­tal when ex­ec­u­tives be­lieve the cash in­fu­sion to be a good in­vest­ment, he says, cit­ing LifePoint’s ac­qui­si­tion of 100-bed Clark Re­gional Med­i­cal Cen­ter in Winch­ester, Ky., last year af­ter the sys­tem agreed to spend $60 mil­lion to build a re­place­ment hos­pi­tal.

At Lenox Hill, board mem­bers and ex­ec­u­tives be­lieved the hos­pi­tal “would sur­vive and thrive if we could get out of the morass of be­ing un­able to gen­er­ate profit that was there,” Bres­lin says. Com­mit­ted cap­i­tal from po­ten­tial part­ners was a “top, top pri­or­ity” along with com­pat­i­ble cul­ture and med­i­cal staff, he says.

Fi­nan­cial losses since 2005 forced Lenox Hill to curb spend­ing and scale back cap­i­tal plans to pre­serve cash. Op­er­at­ing per­for­mance im­proved af­ter the hos­pi­tal joined North ShoreLIJ in May 2010.

Lenox Hill Hos­pi­tal ended last year with net in­come of $8.1 mil­lion af­ter los­ing nearly the same amount the pre­vi­ous year and a net loss of $14.3 mil­lion the year be­fore that, fi­nan­cial records show.

Prior to the deal, cap­i­tal in­vested in Lenox Hill fell $10 mil­lion short each year dur­ing the last half of the past decade, Bres­lin says. Each year, ex­ec­u­tives de­pleted funds set aside for un­planned emer­gen­cies and Lenox Hill’s list of cap­i­tal pro­ject pri­or­i­ties grew. “I knew de­ferred ex­penses would come home to roost,” he says.

Turn­around ef­forts helped to nar­row losses un­til the Great Re­ces­sion, “then the world changed pretty dra­mat­i­cally and what be­came ev­i­dent to the board was that we didn’t have the where­withal to take un­ex­pected hits” with­out a larger, stronger part­ner, he says. Bres­lin, now North Shore-LIJ vice pres­i­dent of man­aged care, no longer de­bates or de­cides how much to in­vest in new tech­nol­ogy, de­vices or ren­o­va­tions at Lenox Hill. He ac­knowl­edges the trade-off be­tween cap­i­tal ac­cess and con­trol, but says Lenox Hill of­fi­cials care­fully vet­ted prospec­tive part­ners on their cap­i­tal strat­egy and com­mit­ment and came away sat­is­fied North Shore-LIJ would in­vest in tech­nol­ogy and pro­mote qual­ity.

North Shore-LIJ is ex­pected to pour $150 mil­lion into Lenox Hill through 2013.

Sys­tem ex­ec­u­tives es­ti­mated cap­i­tal spend­ing would to­tal $125 mil­lion to $175 mil­lion as they eval­u­ated Lenox Hill prior to the deal,

but “un­til you get in there and live with the fa­cil­ity for a year” its not clear how much will be needed, says Mark So­lazzo, ex­ec­u­tive vice pres­i­dent and chief op­er­at­ing of­fi­cer for North Shore-LIJ.

The newly ac­quired hos­pi­tal’s most sig­nif­i­cant needs rank highly among projects seek­ing cap­i­tal across the sys­tem, So­lazzo says. Yet the strug­gling hos­pi­tal can­not con­trib­ute to the sys­tem’s over­all mar­gin to help fi­nance cap­i­tal in­vest­ment. For other hos­pi­tals across the sys­tem, that may mean other projects must wait. “They never drop off the list, but pri­or­i­ties change,” he says.

Roughly half of the sys­tem’s 300 cap­i­tal projects are un­der way or are in prepa­ra­tion, he says. Ex­ec­u­tives re­view projects each quar­ter and ad­just pri­or­i­ties ac­cord­ing to need, he says. “There’s al­ways win­ners and losers.”

North Shore-LIJ, based in Great Neck, N.Y., owns 11 hos­pi­tals. The sys­tem, which last year posted rev­enue of $3.4 bil­lion, bud­gets for a mar­gin of 3% to sup­port its cap­i­tal projects, So­lazzo says.

Spend­ing for in­for­ma­tion tech­nol­ogy, de­vice up­grades and re­pairs, con­struc­tion, ren­o­va­tion and main­te­nance is pro­jected to to­tal $3.1 bil­lion through 2015, with roughly $487 mil­lion for IT.

“It’s al­ways a bal­anc­ing act of the needs,” So­lazzo says. “You will al­ways have more needs than you will have re­sources.”

North Shore-LIJ swiftly in­vested $15 mil­lion to up­grade Lenox Hill equip­ment, he says. North Shore-LIJ is ex­pected to in­vest an­other $75 mil­lion to ren­o­vate Man­hat­tan Eye, Ear & Throat In­sti­tute and $75 mil­lion in the up­grade and ex­pan­sion of Lenox Hill Hos­pi­tal’s op­er­at­ing rooms, car­diac catheter­i­za­tion lab­o­ra­to­ries, as well as pe­di­atric and ob­stet­ric units, So­lazzo says. Lenox Hill and Man­hat­tan Eye, Ear & Throat merged in 2007.

“Lenox has seen more cap­i­tal than it has in a long time,” Bres­lin says.

Lenox Hill Hos­pi­tal is ex­pected to re­ceive at least $150 mil­lion in cap­i­tal im­prove­ments.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.