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The hospital gap

Monday, March 26, 2007
Crain's Chicago Business
by Mike Colias

The growing disparity between rich and poor hospitals 'will likely trigger a new wave of mergers, closures and bankruptcies' [Standard & Poor's]
While interviewing a young radiologist recently, Wayne Lerner, Holy Cross Hospital's interim CEO, was interrupted by an unsettling question: "Is this place still going to be here two years from now?"
Mr. Lerner says it's a "legitimate question" for the South Side hospital he took over in October. And Holy Cross is not alone. Like more than a dozen other hospitals in the city's poorer neighborhoods, Holy Cross faces a cash crunch that threatens its ability to make large, vital investments in facilities, equipment and technology — and that, ultimately, could threaten its survival.
The prognosis couldn't be any different at the area's top-tier hospitals. Downtown and in affluent suburbs, hospitals are spending hundreds of millions of dollars, building new patient rooms, buying the newest computer systems and embarking on massive construction projects.
Those improvements are paid for with donations from wealthy benefactors, with the proceeds from bond offerings or with profits generated by providing expensive care to fully insured patients.
But such options don't exist for hospitals like Holy Cross, Mount Sinai and St. Bernard. Those providers, on the city's West and South sides, will treat thousands of patients this year in deteriorating buildings, using aging radiology equipment and relying on old-fashioned record keeping.
The widening gap between rich and poor hospitals is likely to lead to a "sizable shakeout," New York-based Standard & Poor's analyst Liz Sweeney wrote in a report last week, "as those players that are just marginal now will find it impossible to survive in a more difficult environment. This will likely trigger a new wave of mergers, closures and bankruptcies."
The loss of even a single hospital in a poor neighborhood would punch a hole in the city's health safety net — already strained from deep cuts to Cook County's health system — sending an influx of needy patients with chronic diseases like diabetes and asthma into the city's bigger hospitals, hampering their ability to focus on medically complex cases.
"What happens to us if these hospitals aren't able to adequately invest in their plants or technology is not a trivial matter," says Michael Koetting, vice-president for planning at University of Chicago Hospitals in Hyde Park.

TYPICAL STRUGGLES
The struggles of 150-bed Holy Cross are typical of a hospital in an impoverished Chicago neighborhood. Holy Cross hasn't made a significant capital expenditure since the late 1990s, when staggering operating losses began to suck away all its cash. Executives froze capital spending from 1999 to 2005, a span in which the hospital lost $64 million. Today, Mr. Lerner, the interim CEO, is struggling to pay down $27 million in debt from a bond issue more than a decade ago.
The hospital does plenty of business: Average occupancy is a healthy 75% and Holy Cross had $120 million in revenue last year. But it struggles to make a profit because most of its patients are uninsured or receive public aid. More than a quarter are enrolled in Medicaid, which covers only about 70% of the cost of treating patients. Less than 20% of Holy Cross patients have private insurance.
Last year, after eking out a $470,000 profit, Holy Cross scraped together $4 million for capital spending. That money will have to last two years — and more than $1 million of it will go toward replacing 20 drug-dispensing machines, because the manufacturer is phasing out Holy Cross' decade-old model.
Meanwhile, 30 miles away in west suburban Winfield, Central DuPage Hospital is planning a $250-million campus expansion, just two years after completing a $188-million expansion. The growth is aided by a healthy bottom line: Net profit totaled $213 million between 2002 and 2006. Just 9% of its patients are on Medicaid and half have private insurance, state data show.
Downtown, in the Streeterville neighborhood, Northwestern Memorial Hospital is completing construction on its Prentice Women's Hospital. The building will have 250 patient rooms, many with flat-screen TVs, plus state-of-the-art medical equipment. Total cost: $450 million, paid for with a mix of bond proceeds and private donations. It replaces a 32-year-old facility.
"The theory is that if you don't have all these bells and whistles, you won't get the superior medical outcomes or the competitive advantage with the consumer," says John Wells, a New York-based analyst at Fitch Ratings.
The CEO of Sinai, Alan Channing, can only dream of bells and whistles. Several years ago, the Southwest Side hospital banned patient appointments on the top two floors of its main outpatient building after the state deemed that section of the 50-year-old structure unsafe.
When Mr. Channing arrived in 2004, he ordered an engineer's review of the main hospital, much of which had been built before World War II. He figured the place needed $8 million in repairs. When the engineer's report landed, it hit him like a punch in the gut: Completing a structural overhaul, including replacement of the roof and elevators, would cost $80 million.
Raising that kind of money is nearly impossible for struggling hospitals. Stronger ones typically finance projects in three ways: tax-free bonds, donations and cash from operations.

STRAPPED FOR CASH
Hospitals like Sinai and Holy Cross barely generate enough cash to pay utility bills. In recent financial reports, Sinai showed it had three days of cash on hand — a standard measure of liquidity — and $10.2 million in investments. Compare that with Evanston Northwestern Healthcare, which had 482 days of cash on hand and $1.4 billion in investments.
With Sinai's balance sheet, Mr. Channing says, "the bond market is not an option."
Nevertheless, he's forging ahead with a plan to raise $75 million to replace the outpatient building. Sinai could put up almost $15 million in cash, much of it from a one-time infusion of Medicaid money the federal government approved for Illinois hospitals last year.
Mr. Channing also is planning Sinai's first fundraising drive in more than a decade. But that will put it in competition with high-profile hospitals like Rush University Medical Center and Children's Memorial Hospital, which are raising money for massive construction projects. Unlike those hospitals, Mr. Channing will have to sell potential donors on contributing to a facility they'll never use in a part of the city they never visit — a pitch that hasn't proved successful yet.
"Donors just aren't geared toward giving to an inner-city hospital," says the CEO of St. Bernard Hospital, Sister Elizabeth Van Straten.
Those hospitals are caught in a vicious cycle. If they can't invest in upgrades to their facilities and equipment, they'll be less likely to attract the most lucrative patients. And if they can't attract lucrative patients, they won't have the money to make upgrades. Gentrification of the Lawndale neighborhood around Sinai is bringing in more fully insured residents. But Mr. Channing fears many of these people will seek care at nearby Rush, where an $800-million campus overhaul now under way will result in all private rooms.
"If the choice is coming to Sinai and being in bed next to somebody else or going to Rush and getting a new private room, which would you choose?" he asks.
As these hospitals fall further behind, they're often left with only one choice: going hat in hand to the government.
Sinai hopes to secure a loan with a guarantee from the Federal Housing Administration. After years of lobbying, St. Anthony Hospital on the Southwest Side got a $4-million grant from the state Legislature, helping to replace its 70-year-old, marble-walled operating room two years ago. The result: Outpatient surgeries — a profitable service — rose 17%, because doctors liked the modern space and equipment and scheduled more operations there, CEO Kathleen DeVine says.
But state subsidies are a dubious lifeline, given Illinois' competing budget needs like education. And stopgap funding is "rarely enough for these facilities to thrive," S&P's Ms. Sweeney writes.
For example, Holy Cross plans to use a state grant for a $5.5-million expansion of its jam-packed emergency department, which was built to handle 30,000 annual patient visits but is seeing nearly double that. Yet that won't help Holy Cross update record-keeping technology. Many hospitals have adopted an electronic tracking system that lets ER nurses and doctors pull up a patient's treatment history on a computer screen. At Holy Cross, that information resides on a handwritten form stuffed away in the basement on the other side of the building.
"A lot of physicians will say, 'There's no way I'm working here,' because (we) don't have the technology and resources they want," says Pierre Wakim, head of the medical group that runs Holy Cross' emergency department.
REESE IN DOUBT
No Chicago hospital executives predict closures, though some question whether privately held Michael Reese will stay open. Reese executives didn't return calls.
Ultimately, barring major reforms to the health system, market forces are bound to take their toll. "There's no mechanism to guarantee the survival of even the most important inner-city hospitals," Ms. Sweeney says.
Some say Chicago needs a centralized effort to examine the city's health care system, especially in poor areas. As has happened in New York, a government-empowered body could make hard decisions about which services are needed where and help direct funding, Chicago-based health policy analyst Emily Friedman says.
Even some hospital executives agree more planning makes sense. "I'm not sure it makes sense to build new buildings without some substantial planning first," Holy Cross' Mr. Lerner says.
But would central planning alleviate the funding crunch? What is clear is that these hospitals can limp along for only so long until their ranks begin to thin.
And the closure of any of the city's safety-net hospitals "means we could end up like St. Louis or Philadelphia, where vast areas of people must travel several miles to a hospital," Ms. Friedman says. "I'd like to think Chicago could avoid that fate."
Photos by Erik Unger



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