The Journal Gazette
Sunday, April 29, 2018 1:00 am

After year of turmoil, Lutheran decline evident

Drs. William Cast, Matthew Sprunger and J. Philip Tyndall

It has been nearly a year since the national media reported the turmoil surrounding Community Health Systems, owner of Lutheran Health Network.

Headlines carried complaints of dissatisfied Lutheran physicians – “dirty, dingy hospitals” – as they organized to find a new partner to operate the hospital system. In May 2017, they made a $2.4 billion purchase offer to Community, an offer that was refused. In June, Lutheran Network CEO Brian Bauer was fired and a number of physicians and Lutheran Health board members resigned. The downstream effects of those ruptured relationships continue to be seen as litigation continues. It is timely to recall subsequent media reports and decide, are things better or worse?

A Bloomberg article in June 2017 warned that “Community Health Systems faces anger at lucrative Indiana facility,” pointing out that Community corporate needed “the estimated $300 million in annual profits from Northeast Indiana.” Specific attention was called to lack of timely and adequate Community investment in Lutheran Health, with quality “suffering at the flagship Lutheran Hospital in Fort Wayne.” CEO Wayne Smith had become known for growing Community from a public startup in 2000 to more than 200 hospitals by a strategy of acquisition and cost-cutting but had overreached with a 71- hospital purchase in Florida, accumulating more than $15 billion in smothering debt. On July 2, The Journal Gazette ran a story headlined “Lutheran, doctors back at beginning/CHS officials hope the discontent among Lutheran's staff has been extinguished.”

HealthcareFinance News, on July 27, had an article headlined “As divestiture plan continues, CHS forecasts $137 million net loss for the second quarter.” And in August 2017, an investor – ASL Management's Steven Braverman – took management to task, criticizing Community for paying CEO Smith (also the company's chairman) $350 million since going public. reported Smith's 2016 total compensation as $4.733 million.

In November, Nashville Public Radio reported: “Investors want to know when CHS will start making money again.” Of 206 hospitals, only 127 remained and, despite the sales, burdensome debt remained. Community's financial filings showed year-end debt of $16.7 billion for 2014 and $15.1 billion for 2016. Community announced a net loss of just more than $2 billion for 2017's fourth quarter. Last month, Community announced that it had hired financial firms, including Lazard, to help restructure debt (still near $14 billion), specifically $4.8 billion that will mature in 2019 and 2020. Community has said it hopes to realize $1.3 billion from hospital sales this year.

Community reached agreement with debt holders to replace previous loan agreements and continues negotiations. There is no guarantee hospital sales will generate enough money to adequately reduce total debt, and the interest cost of debt is about $1 billion per year. And, the Wall Street Journal recently cited a Moody's report that showed a nearly 15 percent profit decline for hospital systems, the lowest in a decade. More patients seek care in non-hospital settings.

And so, is Community in recovery mode or is this a slow-motion train wreck? It is hard to tell. We are unable to predict proposed income from hospital sales.

We had expected a greater decrease in debt after selling more than 70 hospitals. We assume that refinancing 2018 and 2019 bonds into 2023 will result in at least slightly higher interest rates with the new bonds trading at healthy discounts, possibly below $70, but we cannot project the amounts that hospital sales will decrease the debt amount that is refinanced. We assume that interest payments will remain at $1 billion per year, possibly more.

The greatest costs for a hospital are human costs, salaries and benefits, but there is a limit to low staffing. Patients notice poor service and safety problems quickly emerge – more patient falls, more wrong medications given, etc. Ratings from the Medicare administration are significantly related to staffing and training levels, and Lutheran Health's lower-half, two-star rating is related to measures of patient experience.

Overall ,we see a facade of business as usual with underpinnings of decline. Tight levels of physician and nurse staffing and the departure of seasoned nurses and physicians can be hidden by contract nurses and traveling physicians, but only at the cost of community, the cost of team-building, the cost of practiced precision that comes from many months or years of working together.

And so, are things better or worse?

Our scorecard reads that matters are not better and trending lower.

Some things are improved. The hospital is cleaner and less dingy; some equipment has been replaced. Despite continued personnel losses, Lutheran continues to have a core of dedicated nurses and staff, but what is needed is investment in infrastructure and in people, preferably people with roots in northeast Indiana.

Debt costs can limit hiring, and it is ultimately the ability to replace retiring nurses and physicians; the ability over time to train teams to practice safe processes; and the ability to provide all of the new equipment people require that underpin quality.

These are the investments – not promises – that will determine the survival of Lutheran Health Network and Community.

Drs. William Cast, Matthew Sprunger and J. Philip Tyndall are the founders of Northeast Indiana Citizens for Healthcare Excellence.

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