Content area
Full text
Hospitals are finding it harder to sustain turnaround efforts as years of cost-cutting have left executives with little room to maneuver
Shortly after Detroit Medical Center recorded a big operational improvement for 2001, reducing losses to $6 million from $34 million in 2000, its management and its bankers pressed ratings analysts for an upgrade.
They especially coveted a bump from Fitch Ratings, the only one of the three rating agencies that carried a noninvestment-grade rating on DMC's nearly $600 million of outstanding bonds.
But Fitch wouldn't budge.
"We said, 'This is great. We commend you.' But we felt it was necessary to have more time to validate a sustained turnaround," says Craig Kornett, a senior director at Fitch.
For Fitch, it turned out to be the right call. Instead of completing a recovery, the system spiraled further into the red, posting a loss of nearly $102 million in 2002. Instead of the upgrade its officials had sought, the system saw its credit ratings plummet. Now, all three rating agencies hold DMC at speculative grade.
Former DMC Chief Financial Officer Nick Vitale acknowledges that in hindsight, he and other DMC officials should have been more conservative in revenue growth projections for the system's suburban facilities, which were expected to offset an increasing indigent-care load. "We felt at the time that we had the necessary plan in place to achieve the results we were budgeting. Clearly, the volume we were anticipating did not develop," he says.
Such scenarios are not unusual in the increasingly volatile hospital industry, where rating downgrades have outpaced upgrades for six consecutive years. Several hospitals and systems have declared a turnaround, only to experience another backslide. Among them: Columbia Hospital for Women, Washington; Island Medical Center, Hempstead, N.Y.; and Mount Sinai Medical Center, Miami Beach, Fla.
Experts say turnarounds are becoming more difficult to sustain because basic cost-cutting moves already have been made.
"The hospitals we're going into now have already had one or two firms that have tried to turn them around over the last three or four years. A lot of the low-hanging fruit has already been taken care of," says Tom Singleton, president of Cambio Health Solutions, Brentwood, Tenn., which employs about 50 full-time consultants.
Cuts in unprofitable services,...