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January 5, 2015 5 To Watch 2015

Karl leads ECHN through year of uncertainty

PHOTO | Pablo Robles Eastern Connecticut Health Network CEO Peter Karl.
By Greg Bordonaro

When Eastern Connecticut Health Network CEO Peter Karl's phone rang around 3:45 p.m. Dec. 11, little did he know the ensuing conversation would dramatically change his plans for 2015.

On the other end of the line was a Tenet Healthcare Corp. executive, informing Karl and three other Connecticut hospital CEOs that the Texas, for-profit hospital operator was giving up on its Connecticut acquisitions.

Tenet spent about $5 million over the last several years trying to gain a strong foothold in the state, but it backed out of purchasing ECHN's Manchester Memorial and Rockville General hospitals, as well as Bristol, Waterbury, and St. Mary's hospitals, after state regulators placed 47 restrictions on one of its deals, including a five-year staffing and pricing freeze.

Tenet said the restrictions handed down by the Office of Health Care Access were too onerous to move forward with any acquisitions.

“I was surprised by this,” said Karl, “because I didn't realize there was so little dialogue between the Office of Health Care Access, the governor's office and Tenet from the time the [deal] conditions were released [Dec. 1]” to the time Tenet pulled out Dec. 11.

Karl said he was hoping Tenet could shore up ECHN's ailing financial position that included a $2 million loss in fiscal 2014. ECHN had several suitors, but Tenet offered the sweetest deal, including a promise to eliminate $90 million in debt, $40 million in pension obligations, and make $75 million in capital improvements, Karl said.

“There was no deal close to that,” Karl said.

With that offer off the table, ECHN faces a $3 million loss in the current fiscal year, but Karl said he doesn't anticipate any major operational changes — including layoffs — in 2015, assuming that demand for services remains stable. However, the hospital network now will be working on a rolling, 12-month budget, and a big concern in two years is the network's ability to meet its bond covenants.

“We have two years to get something done before I would be very concerned,” Karl said.

Karl said he is now moving on to plan B, which will include reviving talks with Hartford Healthcare, Yale New Haven Health System, and possibly a Massachusetts hospital network on some kind of partnership; but it will likely take all of 2015 to find a new deal, and it's unlikely they will find a partner willing to invest as much capital as Tenet, which is publicly traded and has more than $16 billion in annual revenues.

He said the Office of Health Care Access, which regulates hospitals and mergers, stepped over the line with its onerous restrictions on Tenet's Waterbury Hospital acquisition, which could have added new competition in a state quickly being dominated by two major health systems.

“The concern is that the market is controlled by a couple of large institutions that are going to drive costs up,” Karl said. “Tenet was going to be a new player.”

Moving forward, Karl said his team is rethinking the role of ECHN's two hospitals, including having each specialize in different services. Manchester Memorial's focus could be on OB/GYN and orthopedics, while Rockville General could focus on eating disorders and bariatrics.

Both hospitals, however, would maintain emergency departments.

Karl says ECHN's strategy to join a larger health network is necessary for independent hospitals like his to survive, as the Affordable Care Act pressures providers to lower medical costs and improve patient care.

Combine that with shrinking reimbursement levels — particularly among Medicare and Medicaid patients who account for a combined 60 percent of ECHN's clientele — and lower patient volume, as people are encouraged to visit lower cost urgent care centers, and it creates a perfect storm for hospitals.

“We receive 88 cents [in government reimbursement] for every dollar spent on a Medicare patient and 65 cents for every Medicaid patient,” Karl said. “Our fee-for-service model is not sustainable.”

The solution, Karl argues, is to achieve greater economies of scale through consolidation, a trend at work both in Connecticut and nationwide.

Tenet's $105 million deal to acquire ECHN, however, drew significant scrutiny from state regulators and lawmakers as well as unions and other groups concerned about the proliferation of for-profit hospitals in Connecticut.

Karl said politics played a role in the dozens of restrictions placed on the Waterbury Hospital deal, adding that he attempted to salvage the deals after Tenet backed out.

“It's the purchasing power of a larger organization that allows a smaller organization like ECHN to offset the reduction in reimbursed costs,” Karl said.

Karl said the healthcare industry must transition from a fee-for-service to a more risk-based model that offers financial incentives for quality patient care.

“Today, a patient could visit the emergency room, have X-rays, need rehab, home health, follow up medical care,” Karl said. “With a fee-based approach, those would all be separate expenses.”

In the future, Karl said, there will be one bundled payment for all of those services that would be split by providers, which is why hospitals need to be part of a larger healthcare network.

“If that patient needs repeat care, the reimbursement would be less the second time,” Karl said. “There's an incentive to get the care right the first time.” 

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