🔒Karl’s ‘difficult’ year includes budget cuts, merger

Peter Karl doesn't mince words when he describes the year he and his hospital system, Eastern Connecticut Health Network (ECHN), experienced.

“It was very difficult,” said Karl, who leads ECHN's two hospitals — Manchester Memorial and Rockville General — as well as other subsidiaries that collectively posted a $1.9 million loss in fiscal 2015, which ended Sept. 30.

Fewer emergency department visits and state budget cuts, Karl said, eroded ECHN's bottom line, forcing management to cut 143 full-time positions and roll back some employee benefits in 2015.

Karl and his fellow hospital CEOs also got caught up in political cross-hairs as Gov. Dannel P. Malloy criticized not-for-profit hospitals for paying their top executives too much.

Some Good News

There was some good news: In June, ECHN announced it found a new acquisition partner after its deal with Tenet Healthcare fell apart at the end of 2014, raising much uncertainty about the health system's future.

California for-profit healthcare operator Prospect Medical Holdings Inc., which owns 13 hospitals in three states, is currently seeking regulatory approval to purchase ECHN. The deal, Karl said, will help ECHN extinguish $78 million in debt and provide a minimum of $75 million for capital improvements over five years.

Other deal benefits include the ability to reduce expenses through greater economies of scale and advance ECHN's population-health management efforts, which have become a focus for government payers in particular.

Prospect is the same company that wants to purchase Waterbury Hospital.

Cautious Optimism

Karl said he is optimistic regulators will be more open to Prospect's acquisition without placing the types of restrictions, like wage and price freezes, that eventually led Tenet Healthcare to walk away from its deals. Prospect is smaller than Tenet and also focused on risk-based contracts, which many states, including Connecticut, are pushing to reduce healthcare costs and improve care quality.

“Their operating models are very different,” Karl said. “Tenet was very large and focused on creating scale to reduce costs. Prospect is focused on risk-based contracts, moving away from fee for service.”

Karl said state budget cuts to hospitals, which he says cost ECHN $7.9 million in fiscal 2015 and $3.6 million in fiscal 2016, didn't scare Prospect away from the deal, but it did require ECHN to cut costs, particularly in the wake of a $1.9 million loss in fiscal 2015.

All ECHN hospital departments are now running on utility metrics, which means when volume goes up or down, staffing levels fluctuate accordingly.

In addition, ECHN saw a 5 percent volume decline in its emergency department in 2015, as more patients made use of less expensive community services like primary care doctors or walk-in clinics.

High Pay Doesn't Equal High Costs

Karl also scoffs at the idea that exorbitant executive pay is to blame for high healthcare costs, arguing that CEO pay for all Connecticut hospitals adds up to about $30 million, while Malloy proposed cutting $500 million from hospitals.

Looking forward into 2016, Karl said his focus will be on completing the Prospect deal and moving ECHN closer to adopting more risk-based contracts.

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