These CT hospitals keep their independent spirit alive, despite pandemic

In early April, as COVID-19 infections continued to spread across Connecticut and approached their presumed peak, Connecticut Children’s Medical Center CEO James Shmerling had a sinking feeling.

The standalone nonprofit pediatric hospital he joined five years ago had, like its adult counterparts across the state, postponed various non-urgent surgeries — crucial revenue generators — to prepare for an influx of patients infected with a new strain of coronavirus that medical science didn’t (and today still doesn’t) fully understand.

But the wave of patients wasn’t materializing like it was at some other hospitals. As of late July, Connecticut Children’s had admitted fewer than 30 confirmed COVID-19 patients, which is good for children and their families, but not for the formulas the federal government has used to dole out stimulus funding to hospitals during the pandemic.

After four years overseeing mostly steady financial improvements at Connecticut Children’s, Shmerling was facing a potential $60-million deficit — about 12% of revenue — for the fiscal year, and cash on hand was dwindling to a point where it threatened to breach bond covenants. He wondered if his hospital might be in real trouble.

“I think there were probably three days in April where I started wondering, ‘where is this headed?’ ” Shmerling recounted in a recent interview. “We were looking at a tailspin in net revenue. There was so much uncertainty.”

His concerns have eased a bit since then, thanks to about $40 million in federal and state aid the hospital has received, cutting significantly into its projected deficit, though a loss is still expected this year.

And that didn’t prevent the hospital from recently eliminating 3% of its 2,800-person workforce; in March it enacted partial and full furloughs of more than one-third of its staff amid the capital crunch.

Now, patient volumes are starting to slowly recover following the return of elective procedures in June.

Connecticut Children’s is one of the state’s few remaining independent hospitals, which have faced a significant threat in recent months from a coronavirus pandemic that obliterated key revenue streams and caused other financial strain.

Lacking the resources of a larger hospital system, independents have been forced to fend for themselves, leading some to question whether the pandemic will lead to a further consolidation wave.

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Photo | HBJ File

Middlesex Health CEO Vincent Capece Jr.

Two independent hospital CEOs who recently spoke with HBJ — Shmerling and Middlesex Health CEO Vincent Capece Jr. — say they don’t think that will be the case for them.

Indeed, while both could book a loss this year, the pandemic has made them bend, not break, executives say.

‘Never say never’

Capece said Middlesex Health has been healing nicely from its COVID-19 financial wounds and has no current plans to run into the arms of a larger health system.

After estimating a $50-million deficit for the year due to the pandemic, Middlesex has since received approximately $32 million in stimulus aid, and has also been relieved to see surgical volumes fully rebound.

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“We think we could stay around break even for the year, or maybe have a small loss,” Capece said.

Middlesex has been a profitable enterprise, which could make it a desirable acquisition target for larger systems.

Indeed, Capece said Hartford HealthCare and Yale New Haven Health have both asked about it in the past.

“We’ve never closed the door or said that’s something we’ll never do,” Capece said.

But he’s feeling more optimistic about Middlesex’s independent future now compared to when the pandemic began.

“Never say never, but I think we’re as strong as any other independent organization in the state,” he said.

Of course, that outlook could change if conditions worsen, he readily admits. He’s concerned about a potential second wave of COVID-19, which could cause significant harm, particularly if the hospital has to cancel elective surgeries again, and if patients avoid in-person care like they did during the first wave.

“I think every organization, even the big ones, have been hit hard by this,” Capece said. “Could we survive another major downturn? I don’t know.”

There are several other Connecticut standalone hospitals, including Griffin Hospital and Bristol Hospital, but neither made their chief executives available for interviews for this story.

In mid-July, Bristol CEO Kurt Barwis told the Connecticut Mirror that his hospital was facing a $16-million deficit for the current year, and despite several hundred furloughs, could risk breaching bond covenants later in 2020.

No time to waste

Connecticut Children’s Shmerling said he wants his hospital to remain independent.

“From our board to our management team, there is absolutely no interest” in being absorbed by a larger system, he said. “We feel children are better served when there is an independent self-governing children’s hospital.”

While stimulus money, a recently extended credit line and cost cuts have helped pull the hospital out of its COVID-19 crunch, Shmerling says he needs to be proactive to ensure the future fiscal health of his organization. Connecticut Children’s, like many pediatric hospitals, is heavily reliant on Medicaid, which is notorious for not reimbursing the full cost of care provided, and Shmerling doesn’t want to count on government help should another pandemic arise down the road.

To that end, Connecticut Children’s has entered into an ambitious new business venture that could be its most significant to date.

The hospital, working with a private-equity backed company called Guidehouse, recently formed a joint venture company called Children’s Health Consortium that aims to provide revenue cycle management services to a dozen or more U.S. pediatric hospitals over the coming years.

The venture doesn’t involve any upfront capital commitment from Connecticut Children’s. Instead, the hospital will transfer approximately 170 back-office employees to the new company.

Revenue cycle management includes the software and processes used by providers and their vendors to document, bill for and collect on services provided.

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HBJ Photo | Steve Laschever

Connecticut Children’s Medical Center CEO James Shmerling

“There’s a real science to that,” said Shmerling, whose hospital has the highest mix of Medicaid patients in the state. “So it’s important on the commercial side that we’re really great at what we’re doing, because there’s just not enough of it. There’s very little margin of error.”

While the need for revenue cycle employees can fluctuate significantly from month to month, they are a fixed expense for Connecticut Children’s, as well as many of the standalone pediatric hospitals across the country that the new company hopes to court as equity partners.

During the pandemic, the need for those workers declined as patient volumes nose-dived. Connecticut Children’s furloughed a number of revenue cycle staff, along with hundreds of others (the majority of which have since come back to work), Shmerling said.

The idea behind the Children’s Health Consortium is that Connecticut Children’s revenue cycle employees will pick up the slack during busy periods for other member hospitals, and vice versa.

The shared ownership model is meant to seize on economies of scale, and equity members will only pay the new company for the services they’ve received, rather than shouldering the fixed salary and benefit costs of an entire department alone.

The consortium will officially launch early next year, and aims to take on a yet unnamed second investor hospital right away.

From there, it will be a sales game. Shmerling said he’s confident the venture can fill an unmet market need, but it will be crucial to convince other hospitals to buy in.

Shmerling said it might eventually net up to $12 million per year for his hospital.

Equity stakes

Washington, D.C.-based Guidehouse was formed in 2018 from the sale of PwC’s government sector division to Veritas Capital.

Late last year, Guidehouse bought national consulting firm Navigant for $1.1 billion.

The company has been working with Connecticut Children’s for the past seven months on improving its financial operations. After COVID-19 struck Connecticut, executives pitched the joint venture to Shmerling and his team.

The new partnership is similar in some ways to one Guidehouse forged with a Florida-based adult hospital system several years ago. One key difference is the Connecticut Children’s-led partnership plans to offer equity stakes to other children’s hospitals, rather than just a vendor relationship, according to Ian Stewart, a managing director at Guidehouse, who said the equity structure creates an opportunity for children’s hospitals to lower their costs in a way that may not be possible under a vendor-customer relationship.

“This is really about independent systems that do great work by themselves, but by joining together they can invest and create what I think is operational excellence in revenue cycle,” Stewart said.