Investments, patient drop-off taking toll
By Jeffrey Krasner Globe Staff / March 17, 2009
Hit by declining patient volumes, lower investment income, and competition from nearby institutions, Milton Hospital faces a financial squeeze that clouds its future.
Standard & Poor’s, the financial rating firm, recently dropped its ranking of $44 million in Milton Hospital bonds to below investment grade, or junk-bond status. The downgrade will not immediately hurt the hospital, since it is not planning to borrow more money soon, but the lower rating illustrates the 106-year-old institution’s fragile condition.
The hospital had a small layoff in January, and is now looking for more ways to cut costs, said James C. Holleran Jr., vice president of financial services.
"We are trying to open every contract," Holleran said. That includes renegotiating prices with vendors, he said. The hospital also has frozen salaries and suspended planned bonus payments.
Milton Hospital’s predicament is typical of what is happening at many Massachusetts community hospitals. They are losing patients to large academic medical centers with powerful brand names.
At the same time, other potential customers are putting off elective procedures because they are out of work or worried about becoming unemployed and losing employer-paid health coverage. In addition, the stock market’s decline has severely eroded investments.
"The situation in our community hospitals is that our profit margins are very low," said Donald J. Thieme, executive director of the Massachusetts Council of Community Hospitals, a trade group. "The offset has [typically] been nonoperating or investment income. When that craters, you become extremely vulnerable."
Some community hospitals are in danger of violating their debt covenants – target measures of financial health that they have promised lenders they will maintain.
Usually, hospitals that borrow through tax-free bond offerings are re quired to generate revenues greater than debt payments, and also must keep a specific amount of cash on hand.
Holleran said Milton Hospital barely met its requirement for debt coverage on Sept. 30, the end of its last fiscal year, and anticipates doing so in the current fiscal year.
"I don’t expect any problems [meeting covenants] this year, but if these losses continue, there could be issues" in the future, he said.
S&P noted in its report that Milton Hospital lost between $1 million and $1.5 million annually for the three years ended in 2007.
But last fiscal year it lost $5.2 million from healthcare operations.
The losses have continued in the first three months of the current fiscal year, putting the hospital on track to lose between $4 million and $5 million in 2009. In part, that was due to a decline in admissions at the 81-bed hospital – they were down 1.8 percent during the first four months of the fiscal year.
Meantime, the hospital’s investments performed poorly. Short-term investments and restricted assets – those which must be used for specific purposes – fell by nearly a third in the 12 months that ended Sept. 30, to $42.2 million.
To maintain sufficient cash levels, the hospital has pushed those restricted assets into unrestricted status faster than it otherwise would have done
. Holleran said a major problem is that more patients are delaying elective procedures.
For instance, he said, there has been a decline in endoscopies, a procedure which involves a camera being inserted into a patient’s stomach. Even some patients who have health insurance are putting off such procedures, because they often require $150 copayments.
In addition, health insurers and employers are trying to clamp down on expensive imaging procedures like CT scans. More patients are opting for basic X-rays, which generate less money for hospitals.
"Our hospitals across the board, both academic and community, are facing fierce economic challenges," said Ellen Lutch Bender, president of Bender Strategies, a Boston healthcare consulting firm.
"The situation at Milton Hospital is particularly tough as there are two other community hospitals in the same area with severe economic stresses – Carney Hospital in Dorchester and Quincy Medical Center."
Jeffrey Krasner can be reached at krasner@globe.com.
