Ups & Downs | While Saint Vincent churns out profit, parent company reaffirms support for struggling MetroWest Medical
For-profit hospital operator Vanguard Health Systems Inc. established itself in Central Massachusetts seven years ago when it acquired Saint Vincent Hospital in Worcester and MetroWest Medical Center’s two hospitals in Framingham and Natick.
Though Saint Vincent and MetroWest are a mere 20 miles apart, the difference in their financial performance has been vast.
Saint Vincent is one of the more profitable hospitals in the state, churning out a $30.4-million surplus in fiscal year 2010, representing a 9-percent profit margin, according to data from the state’s Executive Office of Health and Humans Services. And for the most recent fiscal year, Saint Vincent earned $22.7 million, which amounts to a 6.9 percent margin.
MetroWest, on the other hand, lost nearly $13 million in 2011 after losing more than $20 million in 2009 and 2010. Its margin has been negative for at least five years. The hospital eliminated 50 jobs in late 2010 to address falling revenues.
MetroWest CEO Andrei Soran referred questions about his hospital’s financial performance to Vanguard spokesman Dennis Irish, who said Vanguard is committed to MetroWest Medical Center, despite its losses.
“Though their financial performance has not been strong, Vanguard has continued to make investments in MetroWest Medical Center,” Irish said. “It’s the best evidence of our commitment to remaining in the Framingham and Natick area.”
Irish said Vanguard has “no plans whatsoever” to sell MetroWest. Despite its losses, the hospital is meeting its annual budget, he said.
Focusing on Orthopedics, Oncology
And Vanguard has a strategy for MetroWest, according to its public filings with the U.S. Securities and Exchange Commission. MetroWest can grab market share by expanding orthopedics, radiation oncology and advanced research capabilities.
Irish noted that both MetroWest and Saint Vincent were placed on the lower-cost tier of a Blue Cross Blue Shield plan launched a year ago, an acknowledgment that they charged insurers less for services than some other hospitals. Vanguard’s hospitals also ranked on the cheaper side of costs for medical treatments and procedures in a 2011 report from Attorney General Martha Coakley, Irish noted.
“Although that’s a financial disadvantage, it’s frankly an advantage in the market right now,” Irish said.
He noted that business has started to pick up as a result and that Vanguard is hopeful for improved financial results in future quarters.
Despite lower costs, Irish said quality has not been compromised at Vanguard’s hospitals, citing a “Top 100 hospitals” ranking from Thomson Reuters last year. And MetroWest received a state award last year for reducing readmissions of congestive heart failure patients by 50 percent
Financial Pinch at St. V’s
But even profitable Saint Vincent has not escaped cuts. Irish said it’s been ahead of the curve in recognizing the need to reduce costs. The hospital laid off 60 employees in October.
“For hospitals, unfortunately, the majority of costs are staffing,” Irish said.
He said Saint Vincent is well-managed and noted plans for a cancer treatment center as part of the CitySquare development project in Worcester, which should bring new business.
“Because it was involved very early on in what we call the managed care industry, Saint Vincent operates very efficiently,” he said.
Irish said Vanguard executives are hopeful of a turnaround. They have noted increased patient volume recently.
Despite their proximity, MetroWest and Saint Vincent are very different hospitals. The former must compete with Boston-based hospitals while the latter is located in a more insulated health care market.
Saint Vincent is also one of several teaching hospitals in Massachusetts, which, according to the EOHHS, are more profitable in the state. The median total margin for Bay State teaching hospitals in the second quarter of 2011 was 5 percent, compared to just 0.3 percent for community hospitals.
Wiggle Room
William Cleverley, a hospital financial consultant with Ohio-based Cleverley Associates, said there’s a short list of things a hospital that’s losing money can do to stem losses.
“If you have a big cash cushion to meet expenditures … or you’ve got a sugar daddy someplace,” Cleverley said.
Though Cleverley has not studied Vanguard’s financial position, he said a for-profit hospital operator that’s publicly traded and backed by a major private equity firm could certainly fit the description.
“It can only continue that to the extent they have other enterprises that are profitable,” Cleverley said.
And Vanguard does, though its earnings reports can be deceiving, said Frank Morgan, an analyst with RBC Capital Markets, which has given VHS its highest rating of “outperform.”
Morgan said Vanguard is a company that makes “big bets” in populated markets that other for-profit providers might avoid. He said Vanguard has turned around struggling hospital systems before and said it has good long-term prospects.
Vanguard has lost $165 million since 2007. It had one profitable year, 2009, and nearly broke even in 2008. It lost $10.9 million in 2011, but made $12.1 million in its second quarter of fiscal 2012.
It has been buying up hospitals in major metropolitan markets like Detroit (it acquired 11 hospitals between July 2010 and July 2011). Those and other one-time expenditures have made the company look bad on paper, but Morgan said other metrics like cash flow and earnings before interest, taxes, depreciation and amortization have been strong.
“We think it’s a well-capitalized company with access to both the debt and equity markets,” Morgan said.
In short, Morgan said Vanguard has time to take losses as it works to make its hospitals profitable by recruiting doctors and adding programs and services.
“What they see are some big opportunities in these hospitals that have been capital-deprived,” he said.
Deficits On The Rise
Hospitals have seen the effects of fewer elective procedures and patient admissions spurred by the 2008 recession. And they’re also grappling with pricing pressure from insurers and public payers, as well as competition from for-profit providers who are taking away previously profitable business lines like lab testing.
Those were among the factors cited by UMass Memorial Medical Center CEO John G. O’Brien late last year after UMass posted a steeply reduced surplus in 2011. Last month, UMass announced 150 layoffs and moves that could lead to the elimination of up to 750 more jobs.
That announcement from the biggest employer in Central Massachusetts came after the health system posted its lowest surplus in years, $27.9 million, in the fiscal year that ended in September 2011. That’s compared to a surplus of $89.6 million the year before.
But many Massachusetts hospitals aren’t so lucky as to turn a profit. MetroWest Medical and Athol Memorial Hospital are the only two institutions in Central Massachusetts that posted deficits in the second quarter of 2011 (the most recent quarter for which data is available), but other regions of the state are faring worse.
Only 41 of the 65 hospitals in Massachusetts posted surpluses in the second quarter of last year, according to the EOHHS. That compares to 49 during the same quarter in 2010.
Central Massachusetts hospitals fared better than many, earning a median margin of 2.7 percent. The Boston area had the lowest margin at negative six-tenths of a percent.
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