CT Children's eyes long-term growth, manages short-term challenges

PHOTO | Pablo Robles Connecticut Children's Medical Center CEO Marty Gavin said he is bullish about the future of his hospital even though it has faced sizable operating losses the last two fiscal years.

PHOTO | Pablo Robles Marty Gavin worked 16 years at the Phoenix Cos. in Hartford before retiring in 2000. He came out of retirement in 2006 to become Connecticut Children’s CEO.

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By Greg Bordonaro

Marty Gavin knows how to take the long view of markets.

The 64-year-old earned his executive stripes in the insurance and financial services sectors, spending nearly three decades managing the ups and downs in the economy and stock market to safeguard his company's and clients' assets.

It's now an approach he has had to adopt as CEO of Connecticut Children's Medical Center, which has faced significant financial headwinds recently, including $20 million operating deficits in each of the last two fiscal years, driven largely by a growing Medicaid patient population that is severely underfunded by the state. In early January, lawmakers approved a special $10 million payment to help shore up the hospital's bottom line.

Despite the recent woes, however, Gavin remains bullish about the future. The hospital's balance sheet, he said, remains strong with little debt and strong cash reserves to combat short-term operating losses. He's steadfast in his belief Connecticut Children's will remain a free-standing, independent hospital, and is implementing a strategic plan to cut costs and diversify its business with an eye toward becoming a regional player beyond Connecticut's borders.

The hospital is also investing in research through partnerships with the UConn Health Center and Jackson Laboratory, which Gavin said will lead to breakthroughs in individualized care for children.

That could be a game-changer for improving patient health and putting Connecticut on the national and global map, he said.

“This has been a three-year challenge,” Gavin said. “I've been through lots of insurance, investment, and underwriting cycles. This happens to be a healthcare cycle we are going through, but this isn't going to last forever.”

Hospital economics 101

All Connecticut hospitals have been pinched financially in recent years, but Connecticut Children's may be facing the toughest challenges.

The biggest issue is Medicaid, the government insurance program for low-income individuals and families. Medicaid reimbursement rates are set by the state, while the federal government foots half the bill. Not only has the percent of costs covered by state Medicaid payments shrunk dramatically over the last six years, but Connecticut Children's has seen a steady uptick in Medicaid patients, largely a result of the Great Recession, Gavin said.

Connecticut Children's, like other hospitals, hasn't seen a Medicaid reimbursement rate increase in years, and now payments from the state only cover about 65 percent of costs, compared to 90 percent in 2008. Hospitals traditionally make up for that shortfall by charging commercial insurers more, a method known as cost shifting, but with 55 percent of its patients now on Medicaid, Connecticut Children's isn't receiving enough money from privately insured patients to make the numbers work, Gavin said. As a result, the hospital lost $63 million from its Medicaid business last year.

By comparison, the average adult hospital in Connecticut only has about 15 percent of their patients on Medicaid.

“This is not a sustainable model,” Gavin said. “This trend line can't continue. I can't cut our expenses to keep up with that. If the state can cover costs at 85 percent or higher, you can cost shift the difference, but beyond that, those losses go straight to the bottom line.”

Lawmakers say they are aware of the unique pressures Connecticut Children's faces as the only free-standing kid's hospital in the state. It has a legal and moral responsibility to accept all patients, regardless of the type of insurance they have, which is why the legislature just approved a special $10 million payment to strengthen the hospital's finances. That money should land Connecticut Children's in the black this fiscal year, Gavin said.

Sen. Beth Bye (D-West Hartford), who co-chairs the Appropriations Committee, said the legislature needs to rethink the way it funds hospitals that see a significant portion of Medicaid patients. But a solution won't be easy to find with the state facing billion-dollar deficits over the next few fiscal years.

At the same time, Bye said she doesn't want a situation where Connecticut Children's must beg the legislature for more money every year.

“We need to try to get our hands around defining hospitals that have a certain size Medicaid population and think about how we can support them,” Bye said. “I don't know what the answer is sitting here today, but we need to look for a fix to fee for service that actually pays for the services provided. I know [Connecticut Children's] is a critical institution for the Hartford region, and they provide really good care. We have to figure this out.”

The Human Services Committee is examining the Medicaid funding issue, Bye said.

Long-term strategy

Despite the financial pressures, Gavin said he's optimistic about the future. The entire healthcare industry has hit a three-to-five year rough patch as it deals with a changing landscape brought on, in part, by federal healthcare reform.

Growing and diversifying the business, Gavin said, will be crucial to make up for Medicaid's funding shortfalls. And he sees Connecticut Children's evolving into a regional player. It already established a foothold in Massachusetts through partnerships with Baystate and Shriners hospitals in Springfield, and a larger deal in western Massachusetts is in the works. Gavin wouldn't elaborate.

Entering New York is also part of the long-term plans.

“The consolidation going on in Connecticut is going to happen regionally as well, in particular in the rest of western Massachusetts and we want to be a player there,” Gavin said.

Jennifer Endicott, Baystate Health's chief strategy officer and senior vice president, said they were attracted to a partnership with Connecticut Children's because it creates economies of scale for the $2 billion acute-care hospital to offer more advanced and comprehensive pediatric services at a lower cost.

Prior to the partnership, many kids in western Massachusetts had to travel 90 miles to Boston to get care. Connecticut Children's is only 25-30 minutes away, and instead of patients and families traveling to receive treatment, doctors will move between Hartford and Springfield.

The hospitals are still determining how the partnership will work and which services will be shared, but both institutions will gain access to a larger patient base. They'll also look into co-hiring specialists to share costs. One area they'll collaborate on is neurosurgery, with Connecticut Children's doctors traveling to Baystate Hospital to provide care.

“Both organizations can benefit from this,” Endicott said. “We have equipment and certain services we can provide and they have the expertise and pediatric care physicians.”

In Connecticut, Children's Medical Center dominates pediatric care and has even more room for growth as adult hospitals continue to get out of the business, Gavin said. It has 19 locations and has boosted its patient base 50 percent over the last seven years by taking over pediatric units at Hartford Hospital, UConn Health Center, and in Waterbury. It is looking to bring higher-end pediatric care to western Connecticut. Gavin predicts the hospital can grow its Connecticut market share by 30 percent.

Meanwhile, cost-cutting initiatives have lowered the hospital's annual expenses by $18 million without resorting to significant cuts to staffing or services, Gavin said.

Research ambitions

But what Gavin said really excites him is opportunities in research and preventative care. Connecticut Children's has formed partnerships with UConn Health Center and Jackson Laboratory on several fronts including an avatar program that aims to develop individualized treatments for cancer patients with solid tumors.

The program focuses on transplanting a child's tumor into genetically engineered mice, and then applying different treatments to determine which is most effective in combating cancer. This approach allows multiple drugs to be tested in the mouse avatar first. It also speeds up the time it takes to bring more precise treatments to patients.

This kind of groundbreaking research, Gavin said, could distinguish Connecticut Children's as a worldwide leader in genomic medicine and put it on a level with St. Jude Children's Research Hospital, which is widely considered the gold standard in pediatric care.

“We have our short-term challenges, but we believe we have put a plan in place to secure our future,” Gavin said. “Long-term the opportunities are enormous.”