Monday, September 12, 2011

Memorial looks at cuts to offset falling revenues

Posted By on Mon, Sep 12, 2011 at 2:35 PM

Memorial Health System: In financial trouble.
  • Memorial Health System: In financial trouble.

City-owned Memorial Health System is instituting a cost cutting program to fill a $7.1 million budget deficit that's accumulated so far this year.

Memorial officials briefed the City Council this afternoon about the decline in revenue, with CEO Dr. Larry McEvoy explaining that from 2008 to 2011 "the (patient) volume has been trending down."

He startled the Council by saying the health system is dangerously close to violating the bond covenants on its $240 million debt, which could trigger bondholders to hire a management company to take over the health system.

That, McEvoy said, isn't good for Memorial or the community, because the management company would act with regard only to the bondholders' stake. In other words, it would slash hundreds of jobs and possibly close down departments just to boost the bottom line.

McEvoy says the system can be helped through this hard time with less draconian steps, and officials say the hospital won't layoff people yet. Instead, the system will look at voluntary reductions in hours, early retirements, and other measures.

McEvoy says the chief problem Memorial faces is the political instability brought about by the protracted debate over its future, and doctors — those who admit patients to hospitals — are leaving Memorial for greener pastures.

The news comes amid efforts to change how Memorial is governed, a process that remains unresolved nearly two years after the Council appointed a Citizens Commission, which recommended in November 2010 that Memorial be converted to an independent non-profit.

Memorial executives have said that Memorial can't compete as a publicly owned hospital, because disclosure laws discourage doctor groups and others from joining Memorial's ranks for fear of disclosure of their contracts.

No such disclosure requirements are imposed on Centura Health, a non-profit that operates the Penrose-St. Francis system in Colorado Springs, and Penrose is gaining market share even as Memorial is losing its share.

A Council task force is preparing a request for proposals that will lead to bids from non-profit and for-profit health care outfits to run Memorial.

Here's Memorial's press release:

Memorial Health System has seen a loss of $7.1 million this year as a result of declining patient volumes and a downturn in the stock market. The organization is undergoing extensive cost-cutting measures in an effort to avoid layoffs and to meet its debt obligations.

Memorial’s net income was $14.5 million below budget as of July; it lost an additional $9.4 million in August (due to declines in the financial markets). The loss puts Memorial at risk of violating what is known as a bond covenant. When hospitals borrow money to build new facilities, they make a number of commitments to investors such as generating a certain amount of income each year.

While layoffs are possible, Memorial hopes to avoid them through a series of cost-cutting measures such as early retirements, voluntary reduction in hours, and hiring only for “mission-critical” positions.

The drop in patient visits is in large part due to the uncertainty around Memorial’s future ownership, and Memorial’s inability to effectively compete in the current health care environment as a city enterprise. Doctors decide where patients ultimately go for their care, and Memorial’s ownership situation is less than ideal for physicians. Also at issue is the sluggish national economy, because many patients are putting off non-emergent treatments or procedures.

Memorial, which is not supported by tax dollars, found itself in a similar financial situation in 2008 with a loss of $32 million. Through new management and cost-cutting measures such as these, Memorial made about a $70 million recovery in one year.

Even though the landscape in health care and at Memorial is very different this time, Memorial is committed to doing what it takes to turn this financial corner.

“During this financially challenging time, we remain committed to our mission to provide highest quality health care,” said Memorial CEO Dr. Larry McEvoy. “Every dollar we earn is reinvested directly into patient care, which only strengthens our resolve to ensure we stay financially healthy.”

Dougan: living happily ever after.
  • Dougan: living happily ever after.

Jim Moore, a retired military officer and businessman who's served as a Memorial trustee for nine years, told Council that no matter what happens in changing Memorial's management and/or ownership, "We won't know whether it's succeeded or failed for five years."

Councilwoman Angela Dougan took issue with that appraisal and likened the $500 million Memorial operation to her wedding, saying when she walked down the aisle she wasn't thinking of giving it five years; she knew her marriage would last.

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