Despite cross-town rival St. Mary’s Hospital on the verge of obtaining a game-changing multimillion cash injection, Waterbury Hospital interim CEO Stephen Laverty says he doesn’t think his organization will be put at a competitive disadvantage.
At least that’s what he wrote in a memo to hospital staff and physicians last week.
But it’s clear the decision by St. Mary’s Hospital to accept a $200 million capital investment from LHP Hospital Group puts Laverty’s 292-bed not-for-profit health care organization in a precarious position.
Waterbury Hospital will likely have to strike a deal of its own, which could finally bring about the consolidation in the region that industry regulators and officials have been pushing for years.
And indeed Laverty said in a memo last week that he has recently hired a New York-based investment banking firm — Cain Brothers — to find the hospital a third-party capital partner or to help broker a merger with St. Mary’s Hospital.
“Such a solution has long been recommended and endorsed by people who play a role in providing health care in Waterbury, as well as state hospital regulators,” Laverty wrote in the memo obtained by the Hartford Business Journal. “To that end, we have repeatedly reached out to Saint Mary’s and have asked Cain Brothers to continue to reach out to Saint Mary’s and LHP Hospital Group to determine whether such a solution can be reached.”
The recent moves by Waterbury and St. Mary’s hospitals come after years of financial problems that have plagued both institutions, which are situated less than 2 miles apart. That proximity has led to intense competition for market share, which has severely hampered both hospital’s finances in recent years.
In fact, a 2007 report from the state Office of Health Care Access concluded that health care services in the Waterbury were “fragmented, competitive and in financial distress,” and that the long-term viability of the health care delivery system there was at risk. The report concluded that having two hospitals in the city may not be economically viable and that St. Mary’s appeared to be insolvent at the time. The report suggested a merger between the two hospitals, or even the closure of St. Mary’s Hospital, as potential options.
St. Mary’s Hospital posted a strong 3.32 percent operating margin in fiscal 2009, but its balance sheet is being weighed down by $25 million in debt and $65 million in underfunded pension liabilities.
Waterbury Hospital, which recently named Darlene Stromstad of Goodall Hospital in Maine as its new CEO, posted a loss — a negative 1.98 percent margin — during fiscal 2009.
At St. Mary’s, the $200 million capital investment from LHP Hospital Group, if approved by regulators, will wipe out the hospital’s debt and allow it to fully fund its pension liabilities, putting the hospital in a significant position of financial strength and allowing it to invest tens of millions of dollars in new technology and capital projects.
Chad Wable, CEO of Saint Mary’s Hospital, said the region needs to have a stronger, integrated health care delivery system and the deal with LHP Hospital Group won’t stop his hospital from engaging in future merger talks with Waterbury Hospital, or other potential partners beyond the city’s boundaries.
Both hospitals were engaged in serious merger discussions in the past but no deal has ever been reached. Waterbury and St. Mary’s hospitals do partner in some cancer and cardiac services, but that’s about it.
“Hospitals can limp along and make it work for a long time,” Wable said. “But it’s not in the best interest of the community. What is in the interest of the community is to create a strong, stable health care delivery system.”
In terms of St. Mary’s proposed deal, LHP Hospital Group Inc., a Texas-based private hospital operator, will own a majority equity position in the newly formed joint venture that will own the hospital, called SW Connecticut Health System LLC. St. Mary’s current staff and management team will remain in place.
That will shift St. Mary’s not-for-profit business model to a for-profit entity.
Wable said the hospital contacted more than 16 potential partners across the country and met with four finalist firms before choosing LHP.
He said it is difficult for smaller hospitals to tap the bond market for significant financing, so the cash injection will allow St. Mary’s to prepare for the brave new world of health care, including new investments in health information technology and upgrades in equipment, infrastructure and personnel.
Among the hospital’s plans is to beef up its primary care ranks from about 20 to over 40 physicians. Wable said he’d also like to add a second da Vinci surgical robot to the mix and expand or add new services. That includes potentially expanding St. Mary’s joint replacement program as well as adding a sports medicine program.
In terms of infrastructure investments, Wable said St. Mary’s has plenty of space so constructing a new building may not be in the cards. But he would like to move toward all private room facilities.
In his memo, Laverty wrote that the St. Mary’s transaction will likely garner intense scrutiny from regulators, who he hopes will take into consideration the needs of Waterbury Hospital.
The deal must get approval from at least the state Office of Health Care Access and Federal Trade Commission.
Wable said he hopes that process moves as “expeditiously as possible,” noting that LHP’s proposed investment would be a major win for the city and state, both of which are severely in need of greater economic activity.
“There are not many companies out there offering to bring in $200 million to the state,” Wable said.
The announcement that St. Mary’s Hospital has made a $200 million deal with a for-profit hospital operator appears to put it in a position to grow while rival Waterbury Hospital is left still looking for a partner in a market state officials think may only be able to support one hospital.
