serviceability plenty: Debt, Lawsuits Complicate Potential St. Joseph Sale

When a star cardiologist at St. Joseph Medical Center was accused of performing hundreds of unnecessary medical procedures in 2009, it changed the course of the Towson hospital and now raises questions about its future.

St. Joseph plans to narrow its search for a new "strategic partner" in coming weeks, but analysts say it may not offer enough new paying patients and other immediate financial benefits to outweigh the liabilities ? including hundreds of lawsuits and declining revenue.

If other hospitals don't ally with or buy it, St. Joseph could close at least some of its operations, the analysts said.

The longer a deal takes, "the more the hospital loses volume and status, and that is not only lowering the sale price but making it more unlikely that anyone will be willing to buy it," said Gerard F. Anderson, director of the Center for Hospital Finance and Management in the Johns Hopkins Bloomberg School of Public Health.

"Hospitals want to buy viable, successful entities, and St. Joseph is not appearing to be that," he said.

Anderson said that across the country, for-profit hospital systems don't shy away from distressed hospitals because they can add new customers, increase negotiating power with insurers and possibly get a tax break if there is debt. But Maryland has a unique rate-setting system that could prevent a buyer from raising prices and quickly reversing the revenue slide.

According to state records, St. Joseph's patient net revenue fell from $361 million in fiscal 2009 to $299 million in fiscal 2011, which ended June 30. Patient admissions dropped from 35,486 to 26,942 over the same period. The hospital has also told state officials it was losing doctors.

Without a buyer, Anderson said, he would expect the hospital to shut its expensive inpatient facilities, including 263 beds, and operate only outpatient services such as doctors' offices and surgical centers.

The outcome rests on the needs of other hospitals and the community, agreed Joshua Nemzoff, president of Nemzoff & Co., a New Hope, Pa.-based hospital acquisitions consulting firm. He said other hospitals may want to enter the area or keep someone else out. Or they may want insured suburban patients to offset their urban uninsured.

The buyers could cut costs by combining administrative functions and reducing staff. They could maintain all the services, eliminate some, or even close the facility entirely and try to steer patients to their hospitals, though he thought the last option was unlikely.

They will likely require that St. Joseph's parent, Denver-based Catholic Health Initiatives, a nonprofit faith-based 72-hospital system, assumes all responsibility for the lawsuits that followed accusations of unnecessary stent procedures.

"They'll find someone who wants it, even if they have to give it away," said Nemzoff, adding that other large hospital systems have left markets this way. "They'll say, 'Here are the keys.' Then, the buyers will decide what to do with it."

The analysts noted that changing needs in the region will also influence what happens to St. Joseph. For example, in the 1980s hospitals began providing more services on an outpatient basis. That's what led Liberty Medical Center in 1999 to transfer inpatient services to its sister hospital, Bon Secours, three miles away.

Other hospitals have bought facilities and improved them, including Johns Hopkins Medicine, which acquired distressed Baltimore City Hospital in 1984 and turned it into Johns Hopkins Bayview Medical Center. More recently it acquired Howard County General Hospital, a deal that allowed the community hospital to expand services and Johns Hopkins to gain suburban patients.

But Baltimore-area hospitals already have a lot of capacity, perhaps too much, according to some observers. An official assessment this year by the Maryland Health Care Commission shows Central Maryland had the most excess in the state, with physical capacity for 583 more impatient beds than those now licensed.

St. Joseph makes up about a quarter of Baltimore County's 1,112 beds, but there are more than 4,000 in the city.

Still, potential buyers could see advantages in St. Joseph. U.S. News and World Report ranked seven specialties as high-performing and ranked the hospital 11th overall in the Baltimore area.

The suitors include the University of Maryland Medical System, MedStar Health, Greater Baltimore Medical Center, LifeBridge Health and St. Agnes Hospital, according the hospitals and others with knowledge of the negotiations.

Robert A. Chrencik, president and chief executive of the University of Maryland Medical System's 12-hospital system, said the St. Joseph's financial situation was troubling but his system has the "medical horsepower" to turn it around. And Greater Baltimore Medical Center's president, John B. Chessare, wrote in a blog post that his hospital and St. Joseph already work well together.

For its part, a St. Joseph spokeswoman said the hospital "is well-positioned for a strategic relationship, and other providers are taking a close look at the opportunity to form a relationship with an established, geographically desirable health care organization like ours."

Vivienne Stearns-Elliott said St. Joseph officials are pleased with the "quality of the submissions received and the level of interest expressed." The hospital is expected to choose finalists in January.

If the hospital were to close fully or partially, it would have to notify several state agencies ? and state officials stress that has not happened. They would have oversight over everything from the way bond debt is repaid to how operations are wound down and where patients would go. State law also requires a closure plan to be approved by the secretary of the Department of Health and Mental Hygiene.

The state has helped some high-cost, underused hospitals close, including Liberty, Leland Memorial in Riverdale and Church Hospital in Baltimore, according to officials at the Health Services Cost Review Commission, which sets hospital rates. The closures save the state system money, said Stephen Ports, acting executive director of the commission.

The county-owned Prince George's Hospital Center in Cheverly, overwhelmed by costs from uninsured patients but deemed necessary to the community, was bailed out by state and local officials in a deal that involves the University of Maryland system. (Nemzoff, the consultant, said it could have been sold if officials had not insisted on a hefty infusion of money while refusing to allow staff or services to be trimmed.)

There's been no review of the community's need for St. Joseph because it has taken no steps to close, said Ben Steffen, acting executive director of the Maryland Health Care Commission.

The cost review commission did credit St. Joseph $5.5 million earlier this year for administration, information technology and other costs. Other liabilities remain unresolved.

The hospital's troubles stem from allegations that medically unnecessary stents were placed by Dr. Mark Midei, who has since lost his license in Maryland. A kickback scheme uncovered during a federal investigation resulted in a $22 million settlement and repayment of funds for questionable procedures. The hospital also agreed to greater federal oversight.

And hundreds of patients are seeking millions in lawsuits against the doctor, St. Joseph and its parent.

One plaintiffs' lawyer noted that the hospital remains profitable despite a drop in revenue and holds $158 million in medical malpractice insurance, enough to cover the potential liability and insulate a buyer.

Andrew G. Slutkin said he is still negotiating with the hospital, and though "we're far apart," he expects the lawsuits to be resolved quickly to aid the sale process.

"St. Joe's has to say they made a mistake and they're fixing it," he said. "Then someone can come in and take over. Everyone moves on."

meredith.cohn@baltsun.com

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