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May 15, 2023

CT Children’s new $280M patient tower a linchpin in broader financial turnaround, expansion

HBJ PHOTO | STEVE LASCHEVER Connecticut Children’s CEO Jim Shmerling stands in front of the Hartford construction site where a new $280 million patient tower is being built.
By Harriet Jones, Hartford Business Journal Contributor

Superhero day has been an annual tradition for the last decade at Connecticut Children’s medical center, and this April, the hospital was able to combine it with a groundbreaking for the most significant expansion in the hospital’s 27-year history.

CEO Jim Shmerling got in on the act, donning a red superhero cape for the accompanying press conference.

The $280 million new tower, adjacent to the hospital’s current Hartford premises, has been in the works for several years. It will house several ambitious new programs, including a fetal surgery center that is expected to make Hartford a national leader in the discipline, a NICU unit with 50 private rooms, and state-of-the-art facilities for bone marrow transplant work and gene therapy.

“There’s so much demand for our services that we’re turning patients away, so we need to expand,” Shmerling said in a recent interview.

The new patient tower is the highest-profile piece of a broader turnaround effort that’s been underway at Connecticut Children’s since Shmerling, a Tennessee native, arrived eight years ago.

At that time, the picture was different than it is today. The hospital had run multimillion-dollar deficits in two of the previous three years.

“The board had approved a deficit. I’ve never seen that before,” Shmerling said of his arrival in October 2015. “The budget when I got here was to lose $8 million, and that was a huge improvement over the previous year. In fact, the board felt like that might be a stretch.”

The legacy financial issues revolved around the hospital’s size and core patient population, he said.

“We’re comparatively small … to other children’s hospitals, so we don’t have the same kind of scale,” said Shmerling. “We have a lot of children who are enrolled in the Medicaid program, and Medicaid does not pay the cost for the care.”

Infrastructure build-out

His approach to fixing those two problems continued a trend begun by his predecessor, Martin Gavin — supporting the hospital’s mission in underserved communities by expanding its overall reach, and thereby tilting its revenue mix toward more sustainable private insurance payments. This strategy was partly achieved by building more outpatient facilities.

“We really didn’t have that many satellites,” he said. “So, we spent a lot of time investing and building out that network across the region.”

Where previously the hospital counted 750,000 children in Connecticut as its core patient population, it has now extended into western Massachusetts and eastern New York, encompassing a potential patient population of 1.2 million children.

And, as it has moved south in Connecticut toward communities in Fairfield County, it has begun to serve more families with access to private insurance, improving the payer mix. The southern Connecticut expansion, not incidentally, also builds Connecticut Children’s brand in part of the state with potential wealthy donors.

Counting affiliate programs as well as its own standalone locations, Connecticut Children’s now operates about 40 satellite facilities in communities that range from Putnam to Poughkeepsie, New York, and South Hadley, Massachusetts to Stamford.

Yale operates the state’s only other children’s hospital.

“He’s had a huge and positive impact on Connecticut Children’s,” said David Roth, who was on the hospital’s board when Shmerling joined, and became board chair shortly thereafter.

“We opened a Danbury specialty care unit, a Westport specialty care center, a Farmington infusion center, an urgent care center in Farmington,” said Roth. “He helped create a clinically integrated network that engages pediatricians from all over the state, which connects us to these doctors and gives them a better understanding of what we can do. And they now refer a lot of their patients to us.”

In addition to the physical infrastructure build-out and new relationships around the state, Shmerling also partnered with peer institutions. Connecticut Children’s now runs the neonatal intensive care units at eight other hospitals in the region, and for some, their pediatric units as well.

As hospital consolidation only gains pace in Connecticut, Shmerling said he sees this as a way of thriving in a changing landscape.

“What we’ve tried to do is be Switzerland,” he smiles. “Children should have access to care regardless of what health system they go to. How do we have access, then, to those systems so that those children have access to our specialists?”

COVID challenges

Connecticut Children’s financial turnaround pre-pandemic was apparent in both top- and bottom-line growth. The medical center saw its operating revenues climb consistently from fiscal years 2015 to 2020, from $311 million in fiscal 2015 to $399 million in fiscal 2020, a 28% increase.

It reported an operating surplus in each of those years, growing from $23.6 million in fiscal 2015 to $27.1 million in fiscal 2020, making it one of the best-performing hospitals in the state.

“This is like a flywheel,” Shmerling said of the hospital’s financial progress. “You’re trying to get that flywheel moving, and that initial point where there’s a lot of inertia takes a lot more effort. But once it starts moving, you start generating revenue and margin, which then we can take and reinvest in additional expansion.”

For the first four years of his tenure, momentum had begun to build, and by 2019, he was presenting plans to the board for the ambitious new patient tower.

It was far from the first time Shmerling had driven forward a major hospital expansion program. He was recruited to Colorado Children’s Hospital in 2006, tasked with planning a relocation of the entire hospital from the downtown Denver building where it had been for 100 years, to a spacious new suburban campus.

He followed that up with a further expansion in 2010: A $230-million, 10-story, 350,000-square-foot addition, to bring the total number of beds at the hospital to 500. That expansion achieved its projected 2012 opening.

In Connecticut, Shmerling’s expansion plans didn’t go as smoothly — they were interrupted by the pandemic.

“As we were hitting our stride, COVID hit, which put us in a tailspin for a brief period of time,” Shmerling said.

Connecticut Children’s furloughed 600 staff during the pandemic lockdowns, and put retirement contributions on hold. Financially, it survived thanks to support from the state of Connecticut and federal government. But, as with most businesses, some work practices were permanently altered.

Telemedicine, which had previously been a negligible part of its business, supported 40% of outpatient consultations through the pandemic. While that percentage has lessened, Shmerling estimates a fifth of visits are still done remotely, and telemedicine has become another arm of the mission to extend the hospital’s geographical reach.

Expansion plan reborn

By June 2022, Shmerling and his team were back at work on the expansion project, submitting the proposal for state and city approvals. At the same time, Connecticut Children’s began to build the clinical programs that will eventually be housed in the new tower.

Shmerling last year recruited one of the nation’s top fetal surgeons, Dr. Timothy M. Crombleholme, to come to Connecticut from Dallas, promising to build a fetal surgery program around him that could potentially attract patients from across the nation to Hartford.

“There may be seven or eight children’s hospitals across the country (that) can do fetal surgery in utero, (that) have a comprehensive program,” said Shmerling.

(Yale New Haven Children’s Hospital noted it has a comprehensive in-utero fetal surgery program led by Dr. Mert Ozan Bahtiyar.)

PHOTO | CONTRIBUTED
Dr. Timothy M. Crombleholme, one of the nation’s top fetal surgeons, joined Connecticut Children’s last year.

That focus on the youngest of patients will be continued in Connecticut Children's new NICU, which will provide a level of care that’s not currently available at the hospital, including private accommodations for families.

The improvements will also extend to cancer treatment rooms with improved airflow and isolation, and a gene therapy unit. Shmerling said that will mean Connecticut sends fewer really sick patients to Boston for treatment.

It’s a case that has impressed many, including Wall Street investors. New York ratings agency Fitch Ratings recently called Connecticut Children’s planned expansion a “once in a generation transformational project.”

Fitch opined because the hospital is taking on about $112.4 million in bonded debt to help finance the expansion. This marks the first time Connecticut Children’s has gone to market for bond funding.

It received an A+ rating from Fitch and an A3 rating from Moody’s.

“The ‘A+’ rating reflects CT Children’s excellent market position as the only independent children’s hospital in the state of Connecticut, with a 90% market share in its primary service area, which includes Hartford and the surrounding counties, and a growing market share in its secondary service area,” Fitch said.

Board chair Roth said Shmerling has a lot to do with the positive ratings.

“I think a lot of the fact that we got the outstanding bond ratings we just received are based on what he’s done and the confidence that he’s created in our organization,” Roth said.

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