Hospitals' Star-Crossed Financial Engineering

And speaking of the costs of financial maneuvering by hospitals, the Wall Street Journal just reported on "Hospitals' Wall Street Wounds,"

Hospitals nationwide are tangling with Wall Street to get out of disastrous wagers that have complicated their financial problems.


Some hospitals are paying millions of dollars in penalties to get out of derivatives contracts, after betting incorrectly that interest rates would rise. Other hospitals are paying higher interest rates. At many, these ill-fated financial bets have contributed to layoffs and scuttled projects.


More than 500 nonprofit hospitals—at least one in six—bought interest-rate "swaps" in a bid to lower their borrowing costs, estimates Municipal Market Advisors, a Concord, Mass., consulting firm. The swaps allowed hospitals to act much like homeowners switching from a floating-rate mortgage to fixed-rate one, betting on rising interest rates.

For a fee, the hospitals received a fixed rate to sell bonds, lower than the municipal-bond market at the time. These bets backfired when the Federal Reserve cut interest rates to nearly zero from more than 5% in 2007.

Hospitals also issued auction-rate securities—which reset bond prices weekly or monthly through auctions—that represented about a third of the $330 billion market for these derivatives. Hospitals paid Wall Street firms more than $120 million in fees for the securities between 2005 and 2007, said data firm Thomson Reuters. That market dried in the 2008 financial panic, leaving hospitals with higher interest rates.

The article included a few pointed examples, e.g.,

In April 2007, Smith Barney brokers pitched Tri-City Medical Center in Oceanside, Calif., on ways to save money on interest rates. In a presentation, the brokers argued that the hospital could save tens of millions of dollars by refinancing its debt with derivatives from parent Citigroup, according to a lawsuit filed in April 2010 against Citigroup and Smith Barney, now co-owned by Morgan Stanley.

'Historically low' interest rates created an 'optimal environment,' according to Citigroup documents reviewed by The Wall Street Journal. 'Citigroup can mitigate the primary risks,' according to a slide presentation.

Persuaded that it could cut its interest rate—5.7% at the time—on $67 million in outstanding bonds, the hospital issued auction-rate securities and added interest-rate swaps, according to the lawsuit and Daniel Callahan, an attorney for the hospital.

Soon, the auction-rate market collapsed. Investors stopped bidding on these securities and the banks that sold them stopped acting as a buyer of last resort as they had in the past. This forced many hospitals and other issuers to pay a maximum penalty rate—sometimes up to 20%—that kicks in if there aren't buyers.

As a result, rates shot up to 17%, costing Tri-City some $16 million more than it would have paid under its old rates, according to the lawsuit, filed in California Superior Court in Orange County.

The hospital board replaced many top officials and paid Citigroup more than $6 million to get out of the auction-rate securities and the interest-rate swaps, Mr. Callahan said.

The loss 'continues to impact Tri-City's ability to meet the needs of the entire community,' Mr. Callahan said, delaying the expansion of services and capital improvements.

Auction-rate securities 'were an engineered, artificial market supported by the activities of the investment bankers designed to postpone a collapse,' the hospital alleges in the lawsuit.

At least one financial expert agreed:

'Financial engineering by Wall Street has been a huge part of hospital's financial problems and has even translated into a lack of hospital beds,' said Brian McGough, a managing director of health-care investments at Bank of Montreal Capital Markets in Chicago.

This is another example of how health care organizations, including respected not-for-profit institutions, jumped headlong into the transactions first economy of the last 20 plus years.  The were lured by the prospect of making easy money from financial transactions.  However, it looked like those who really made money were the middle men who sold everyone on the magic of derivatives.

You would have thought that the highly compensated financial wizards that hospitals and other health care not-for-profits chose for their leaders in the last 20 plus years would have been able to see through such nonsense.  Why were they paid so much, if not for expertise in this area?  But I would suspect that they too became distracted by all the money floating their way to think about how it might end. 

We have often decried the problems of ill-informed health care leaders who do not have direct experience in actually providing health care, or much sympathy for the values of health care professionals.  Breaking the medical "guild," and putting professional managers in charge of health care was once touted as a way to control costs.  It is ironic that after  health care organizations became sold on the uncanny abilities of managers with business, usually finance or marketing training, these geniuses turned out to be as gullible about the wonders of Wall Street as everyone else. 

The Failure of "Success Healthcare" - When Financial Maneuvering Takes Precedence Over the Health Care Mission

In the last few years, it seems that the whole world got tangled up in a web of complex financial dealings that mostly benefited those moving the money and paper, but often harmed everyone else.  So it should be no surprise that health care was similarly affected. 

A story from the St. Louis Post-Dispatch provided an illustrative case.  The news article began discussing the current difficulties of two local St Louis hospitals, then provided an explanation in what amounted to a series of flashbacks. Let me re sequence it a bit, starting with the background of two local hospitals that got caught up in web.

Background

For several decades, Forest Park Hospital — founded in 1889 as Deaconess Central Hospital — was one of the city’s leading community hospitals, serving a broad spectrum of patients including many African-American residents from north St. Louis.

But in recent years, the hospital’s revenues and its number of patient visits had waned because, in part, of the emergence of major hospitals in west St. Louis County and its decision in 2006 to discontinue obstetric services.

As the hospital struggled, it continued to be passed along from one owner to the next. In 2004, it was acquired by Argilla Healthcare Inc. Argilla merged with Doctors Community Healthcare Corp. of Scottsdale, Ariz., which became Envision Hospital Corp.

Former board member Buford said Forest Park’s downfall began several years ago when Envision executives made the decision to use the hospital’s profits to help prop up a faltering hospital that Envision owned in Washington.

In 2005, Envision sold the buildings and land of Forest Park Hospital and St. Alexius Hospital to Medline Industries, the Illinois manufacturer of surgical supplies.

How the Hospitals were Sold to Success Healthcare LLC

To address its financial problems, Envision decided to sell its accounts receivable to a firm in Florida. Here is the rationale:

Less successful hospitals operate on razor-thin profit margins, waiting for slow-paying state and federal agencies to provide Medicaid and Medicare reimbursements. Such hospitals have difficulty obtaining financing and lack dependable cash flow.

To provide support to a distressed hospital, the Florida partners would purchase its accounts receivables at a discount. For instance, if the government, a health insurer or patient owed a hospital for services, the partners would purchase that invoice for less money. The hospital, in turn, would have cash in hand.

Note that "hospitals tend to avoid such cash-flow companies, because some of them use heavy-handed collection tactics." However,

For struggling Forest Park and St. Alexius, selling their accounts receivables was an alluring option.

So,

Forest Park also was dogged by creditors and having difficulty making its payroll and paying utility bills.

That’s when Envision began doing business with one of the Florida partners’ firms, Sun Capital Healthcare Inc., which purchased $61 million in receivables from Forest Park and St. Alexius.

When Envision defaulted on its sales agreement in September 2008, the Florida partners formed Success [Healthcare LLC] to purchase the two hospitals for $39.5 million.

The Promise of a Turn Around

To the public and the struggling hospitals, the purchase by Success Healthcare LLC seemed a promise of deliverance:

Eighteen months ago, the new buyers of Forest Park Hospital vowed to revive the beleaguered institution.


They voiced optimism that the once-thriving, 450-bed medical center could be saved by fresh capital and determined leadership. They seemed equally enthusiastic about their other acquisition — St. Alexius Hospital in south St. Louis. Even the name of their company — Success Healthcare LLC — evoked the sense that better days were ahead.

Also,

When Success Healthcare bought Forest Park Hospital in December 2008, company officials spoke of transitions, not cutbacks.

In a statement, the company called Forest Park and St. Alexius hospitals important community assets, saying that it planned to enact a 'turnaround plan and financial strategy' in the next six months “that will support the immediate and long-term objectives for the hospitals.'

The Actual Results

Better days were not ahead.  Instead, as summarized by the Post-Dispatch article,

But the three partners from South Florida were ill-prepared to make good on their words. In reality, they were already deep in a financial scandal that involved the potential loss of more than $500 million in investor funds, the suicide of an investment manager in Bermuda, and allegations of fraud and self-dealing.

The mess resulted from the involvement of what became Success Healthcare LLC and an off-shore financier. First, here is some information on the history of the ironically named Success Healthcare LLC:

In recent years, [Peter] Baronoff, [Howard] Koslow and [Lawrence] Leder had built a small empire of health-related companies, whose holdings include at least 18 hospitals, and two finance firms. The firms share an office building at 999 Yamato Road in Boca Raton, Fla.

Baronoff, a former deputy mayor of Boca Raton, had worked as a wine and spirits importer. Koslow had experience in financial services and real estate. Leder, an accountant, was a former supervisory auditor for the U.S. General Accounting Office.

The partners marketed themselves as 'rescuing health care clients in financial emergencies,' including providers that file for bankruptcy protection or are considering such a filing.

Then enter the off-shore financier:

Court records indicate that the Florida partners approached [William] Gunlicks in 1999 to invest in the health care receivables business. Two of the partners — Koslow and Baronoff — formed a Bermuda-based venture with Gunlicks in December 2009 called Stewards & Partners Ltd. to attract offshore investors.

But between 1999 and December, 2009, things had had gone bad,

The first sign of serious problems appeared in April 2009, when the Securities and Exchange Commission filed a case against money manager William Gunlicks, a former Chicago banker whose investment funds provided hundreds of millions of dollars to the Florida partners to help finance their ventures. The SEC accused Gunlicks of placing at risk about $550 million in investor funds, including $5 million invested by the archdiocese of New Orleans.

Soon after, Gunlicks’ fund manager in Bermuda killed himself with an overdose of pills, upset that he had lured investors to the troubled fund, according to media reports. Gunlicks, who declined to comment, settled the SEC case — agreeing not to operate another investment fund.

In July 2009, a receiver appointed by a federal judge — whose mission is to recover Gunlicks’ investor’s money — sued the Florida partners’ finance companies for allegedly defaulting on loan payments to Gunlicks. The receiver accused the partners of fraudulently transferring hundreds of millions of dollars to purchase or prop up distressed hospitals that they owned. Investors also have sued the Florida partners.

The troubles afflicting Success Healthcare LLC quickly affected the hospitals they had promised to save:

There are conflicting accounts about the financial strength of the Florida partners, but this is clear: They do not appear to have the wherewithal to operate Forest Park as a full-service hospital, and their financial troubles could also negatively affect St. Alexius, which reported in 2008 a bare-bones profit margin of 1.38 percent.

Daniel Newman, the court-appointed receiver, has asserted that the Florida partners’ finance firms 'had long been insolvent ... and had been losing money.' He has accused them of overstating their revenues and assets to conceal at least $50 million in losses in recent years.

The results on local health care were not good:

By April of this year, Forest Park Hospital had laid off about three-quarters of its staff and reduced its operations to a small emergency department, 20-bed psychiatric ward, laboratory and pharmacy.

'It’s a very dire situation,' said Dr. James Buford, president of the Urban League and a former member of the Forest Park Hospital’s board. 'It wouldn’t surprise me if the hospital went under. There hasn’t been a necessary infusion of capital to make it work.'

Today, Forest Park Hospital is an almost empty landmark that overlooks the renovated Highway 40 (Interstate 64). The hospital is trying to use only one of its six floors and staffs a few dozen patient beds. Meanwhile, St. Alexius Hospital continues to offer a range of patient services, though it staffs only about one-third of its 456 licensed beds.

Summary

First, I must admit that it is possible that the two St Louis hospitals could not have been maintained in their original configurations by even the most knowledgeable, dedicated, and visionary leadership. It may be that there location was untenable, given the growth of powerful competitors.

However, it is hard to believe that the complex financial maneuvers in which they were caught up provided any benefits to patients, health care, or health professionals. Instead, it is likely that these maneuvers provided considerable personal gains to the people behind them (although these were not investigated in the St Louis Post Dispatch story).

The big lesson: be very skeptical of glorious promises, especially those that come from new health care leaders who turn out to have no knowledge or background in health care. (Note that the leaders of Success Healthcare had no apparent background in actually providing health care, and no apparent commitment to the values health care professionals ought to support.) When you meet the new boss, assume at best he or she will be "same as the old boss," (to the lyrics of "Won't Get Fooled Again.")  We seem to be caught up in a business culture in which every new leader and fashionable management strategy is hyped and spun, and somehow people believe it all, forgetting how badly the previously hyped leaders and strategies crashed.

How many times have we health professionals been told the new CEO, the new corporation taking over, the new business strategy will make everything better? How often has that been true?

Health care desperately needs leadership that understand the context, and believes in the values.  The quick buck artists have been making themselves rich, while health care on the ground becomes poor.  How much money goes into the pocket of the clever leaders for their fancy financial maneuvers, rather than to provide patient care?  The answer might explain why US health care is the most expensive in the world, while primary care, and in this case, basic hospital acute care becomes less available.

Sanofi-Funded Society of Hospital Medicine Stands Up for Lovenox

Here is another case to raise questions about the true goal of some medical societies.  As reported by Alicia Mundy in the Wall Street Journal in late June,

A medical researcher and two medical groups with financial ties to Sanofi-Aventis SA have asked federal regulators to hold off on approving generic forms of a Sanofi blood-thinner....

Citing potential patient safety issues, the head of the Society of Hospital Medicine and a medical researcher at Duke University last month sent letters to the Food and Drug Administration contending that Lovenox is too complex for any generic maker to copy fully.

Earlier this year, another Sanofi-sponsored medical group, the North American Thrombosis Forum, sent two letters in favor of Sanofi's position opposing generic Lovenox. None of the letters mentions the signer's financial support from Sanofi.

Two small drug companies, Amphastar Pharmaceuticals Inc. and Momenta Pharmaceuticals Inc., filed applications to the FDA in 2003 and 2005 respectively seeking to sell generic Lovenox, called enoxaparin.

Of course, the two medical societies involved denied that there was any relationship between their support from Sanofi-Aventis and their concerns about the safety of biogeneric medications that might compete with a Sanofi-Aventis product (which, as the WSJ article noted, "had global sales of $4.57 billion in 2009").

Laurence Wellikson, chief executive of The Society of Hospital Medicine, which represents doctors who coordinate patient care, said his letter to the agency 'was based entirely on the best evidence-based medicine available and the collective experience of SHM's senior hospitalists.'

Also

Ilene Sussman, executive director of the North American Thrombosis Forum, said the group's doctors are concerned about generic Lovenox, and its letter was independent of Sanofi.

The CEO of the SHM denied even a responsibility to disclose the Society's support from Sanofi-Aventis:

Dr. Wellikson said it wasn't necessary to disclose that the group receives financial support from Sanofi because its letter 'focused on providing the best, most effective care to the hospitalized patient.'

In fact, the SHM web-site includes a "disclosure of organizational support" page which suggests Sanofi-Aventis provided somewhere between $200,000 to $800,000 for three projects of the Society's projects, "pharmacoeconomics," "improving glycemic control," and "preventing VTE." The latter presumably could have something to do with anti-coagulants such as Lovenox. (The numbers are vague because the statement only discloses the amount of support provided in broad ranges.) Thus, support by Sanofi-Aventis could provide as little as 2.7% or as much as 11.1% of the Society's total income, which was noted to be $7,203,596 in its 2009 Form 990 filed with the IRS, and publicly available via Guidestar.

Given the broad mission of the SHM

SHM is dedicated to promoting the highest quality care for all hospitalized patients. SHM is committed to promoting excellence in the practice of hospital medicine through education, advocacy and research.

one wonders why it would want to get officially entangled in the approval process for specific biogeneric drugs.  If the leadership of the Society is so concerned about the safety of anti-coagulants, one wonders why they did not speak up about the case of the lethal contaminated heparin, about which we have blogged extensively, most recently here.  (I can find nothing on the web to suggest the Society, or Dr Wellikson, ever noted any concerns about this issue.)  Of course, that case involved heparin sold by Baxter International, whose production was out-sourced to a questionable supply chain.  SHM also receives support, amounting to something between 0 and $100,000, according to its "disclosure of organizational support" page, from Baxter International. 

Thus it appears that the leadership of SHM was very concerned about the safety of an anti-coagulant manufactured by a competitor of Sanofi-Aventis which could threaten that company's revenues from the drug, while Sanofi-Aventis is one of the Society's major financial supporters.  On the other hand, the leadership seemed unconcerned about the safety of an anti-coagulant sold under the Baxter International label, while Baxter-International is also one of the Society's major financial supporters.  So it is hard to tell whether the leadership is more concerned about the safety of anti-coagulants, or the financial interests of the drug companies that support it. 

The problem with the funding of health care professional societies by health care corporations that sell products or services that doctors can prescribe or order is that it raises the suspicion that such societies may use their considerable influence to serve the corporations', not patients' interests, and so undermine the professional values of the societies' members.  For this reason, Rothman et al suggested that such societies sever most of their financial ties to such corporations.(1)  (See our blog post here.)  As long as the SHM chooses to accept support from drug and device companies, questions will be asked about the effects of such support on how the Society uses its influence.  Furthermore, assertions that such support is so irrelevant that the Society need not even disclose it will only fuel more suspicion.

If ostensibly mission-driven not-for-profit health care organizations, like health care professional societies, but also including medical schools, academic medical centers, and patient advocacy groups, want the public and health care professionals to believe that they really are mission-driven, they need to spurn funding from organizations with vested interests whose service might distort these missions.

Hat tip to Steve Lucas for his comment here.

References

1. Rothman DJ, McDonald WJ, Berkowitz CD et al. Professional medical associations and their relationships with industry. JAMA 2009; 301: 1367-1372. (Link here.)

Jurassic Attitudes about Medical Informatics: in the U.S. Navy?

The message below to a listserv for Chief Medical Informatics Officers and related positions was recently forwarded to me by a colleague. I cannot believe what I am reading, as it reflects attitudes I'd thought were extinct by the late 1990's ("I don't see the value of clinical informatics").

The last time I'd heard such nakedly Jurassic views, and other anti-physician informatics attitudes as in this 1999 essay I penned, was from the C-level officers of the hospital where I was CMIO in that time frame, Christiana Care Health System in Delaware.

From: (Withheld)
Date: Sun, Jul 4, 2010 at 9:24 AM

Hi All,

I was recently told by one of our senior leaders that he saw no value to Clinical Informatics and followed that up by disbanding the Clinical Informatics Directorate at the BUMED (Headquarters of Navy Medicine) level.

I successfully countered that argument with a more senior leader, but I tried to find objective evidence of the value of Clinical Informatics without success. As an academic family physician who lives, eats and breathes evidence-based medicine, I try to make all my decisions and arguments for and against positions/programs based on the best available evidence. In this case, all I could use was potential value and logic.

My question is this: Does anyone out there (and I have already discussed this with [name redacted - ed.]) have any objective evidence that shows the value of clinical informatics to the Enterprise (which has multiple definitions, but suffice it to mean across an entire health care system.however large)? I have already talked with [name redacted - ed.] about including a survey of CEO's/COO's/CMO's/CIO's as to the value they see in clinical informatics, but that is some time in the future. I really need some data now. Anyone have anything? Any and all assistance is greatly appreciated.

In the face of the apparent spectacular failure of AHLTA ($4 Billion Military EMR "AHLTA" to be Put Out of Its Misery? Also, Does the VA Have $150 Million to Burn on IT That Was Never Used?), I certainly view such statements as extraordinary, and in a very negative sense.

It has become my opinion that Jurassic attitudes about medical informatics are virtually unremediable; they suggest an underlying technical and mental deficit in those who proffer such opinions that is not correctible by evidence and logic. (I can predict with a good degree of certainty that this "senior leader" had a role in AHLTA's demise.)

I suggest a different approach: surely patients received suboptimal care (and perhaps suffered injury) under AHLTA. The freebie newspapers serving the soldiers such as I have seen in my visits to Fort Dix, where my mother has commissary/PX privileges as a result of my father's service-connected injuries and disability, might find such a story "interesting."

In the meantime, I am doing a John Galt regarding persons espousing the "I don't see the value of informatics" view. I'm frankly tired that such people remain in the healthcare workforce. While I could provide a lot of material supporting the value of informatics (actually, its essential nature) that I and others have written over the years, I choose to no longer do so.

The military person proffering this view is apparently a "senior leader"; it's their responsibility and indeed obligation to make the Navy better. Let them lead.

And let the pieces fall where they may.

-- SS