After Tenet Collapse, A Scramble: Rockville, Manchester Hospitals Up For Sale [Courant]

February 13, 2015

Article as it Appeared in the Hartford Courant

Hopes were still alive for a merger with Tenet Healthcare when the board of directors at Eastern Connecticut Health Network convened its regular monthly meeting at 7:30 a.m. on Wednesday, Feb. 4.

Twenty-four minutes later, in mid-meeting, CEO Peter J. Karl took a phone call from Trip Pilgrim at the Texas-based hospital chain.

The deal was off.

After years of effort, Tenet was done trying to negotiate with the state for acceptable conditions to take over five hospitals, including ECHN’s Rockville General and Manchester Memorial.

Instantly, Karl and the rest of the ECHN board turned to their backup plan. Before 10 a.m., Karl had his marching orders: Send formal requests for proposals for a merger or partnership to four large, in-state, not-for-profit hospital systems.

By Friday, Karl sent out the requests. Now ECHN awaits bids to, in essence, sell itself. “It’s been a whirlwind to say the least,” he said.

And not just for him.

Even before the Tenet deal collapsed, the top Democrat and the top Republican in the state Senate jointly submitted a bill to the General Assembly’s public health committee, “To establish a consistent and fair process for hospital sale oversight by treating all sales equally.”

Whatever else the collapse of the Tenet deal did — awaken fears even among liberals that the state really is too anti-business, for example — it shook up the system. The affected hospitals are scrambling to find new partners or go it alone, larger hospital systems are scrambling to see whether they can step into the void and public officials are scrambling for a workable way to regulate the upcoming wave of mergers.

Some people might want to see the state’s 29 acute-care hospitals remain in operation as they are, but that’s not going to happen.

“I would say in two to three years there would be a threat to ECHN’s long-term survival if we don’t partner with someone,” Karl said. “Consolidation is inevitable, so it’s a matter of getting to the dance on time.”

Karl did not disclose the hospital systems that received Eastern Connecticut Health Network’s requests for proposals, but the four largest in Connecticut are Yale New Haven Health System, Hartford HealthCare, St. Francis Care and Western Connecticut Health Network.

Like ECHN, Waterbury Hospital has been working for years to find a merger or operations partner.

“I believe that every community or independent hospital will be developing some type of relationship with a bigger partner — that’s what is happening in the health care industry across the country,” Darlene Stromstad, the Waterbury Hospital CEO, said in a written statement this week.

Limited Resources

The trouble is that the process we have now for approving mergers does not work.

It’s fine for in-state hospital systems taking over smaller, community hospitals, as has happened often in recent years. But the in-state systems, such as Hartford HealthCare, parent of Hartford Hospital, and even Yale-New Haven, do not have a bottomless source of money.

Not-for-profit hospitals need to make a surplus of about 4 percent a year to raise millions of dollars for equipment and building upgrades. Connecticut’s hospitals, on average, have fallen short of that figure in recent years, so there’s a need for some out-of-state takeovers with new cash.

Tenet would have spent at least $400 million over the next seven years under its agreements with Waterbury Hospital, St. Mary’s in Waterbury, Bristol Hospital and the two at ECHN. But when it went to the state for approval, the merger conditions suddenly became much stricter than the rules imposed on in-state hospital systems taking over smaller hospitals.

That, of course, is why Tenet exited on Dec. 11, after it saw the 47 conditions proposed by the state Department of Public Health’s Office of Health Care Access. The list included maintaining all jobs, pay levels and medical services for five years, a nutty requirement even by Connecticut standards.

The legislature had rejected the same conditions in two successive years.

Some policymakers say it’s preferable that we see local takeovers rather than takeovers by for-profit, out-of-state chains. House Speaker Brendan Sharkey, for example, said he was not crushed to see the Tenet deal fall apart — especially, he said, after Tenet “operated in bad faith” by pulling out before the approval process was done.

“It’s local vs. out-of-state,” Sharkey said, adding, “I don’t want health care decisions being made from Dallas when they can be made in New Haven.”

That’s OK in theory, but it’s far from clear that the big Connecticut systems can or will take on all the community hospitals that need merger partners.

Whatever happens, it’s likely that more jobs will be lost, not because hospital employees are idle — some places are understaffed — but rather because of the payment system that forces hospitals to lose money on Medicaid services. Waterbury Hospital is just finishing its round of cutting 80 full-time-equivalent positions, affecting 100 or more people. And Rockville General eliminated about 30 positions last fall.

Seeking New Rules

Yale-New Haven would have been a part-owner of the Tenet Connecticut operations and the “clinical partner.” So it might be logical to believe, as Sharkey does, that the giant system, which already owns Bridgeport Hospital and the former Hospital of St. Raphael in New Haven, among others, could step in where Tenet left off, at least for Waterbury Hospital.

Others say no, Yale-New Haven is good at running large, urban hospitals, not smaller community ones. And, again, there is the matter of huge cash infusions that are needed.

Sen. Len Fasano, R-North Haven, the GOP leader in the Senate, sees another problem with Yale-New Haven — its tendency, he said, to take over local doctors’ practices and merge hospital operations, as it did with St. Raphael. Buying private practices is an industry trend, but Fasano and others say that Yale is doing it more aggressively than most.

“I like independent hospitals, I want them to keep their identity. I like private practices and I want them to keep their identity,” Fasano said.

He and Sen. Martin Looney, D-New Haven, the Senate president pro-tem, have worked together to propose an armload of hospital reform bills that will come up in the legislature. Together, the reforms are sweeping, including controls on facilities fees, measures to make prices more transparent and ways to grade hospitals based on quality and cost.

The Looney-Fasano bill that would address the merger process, by equalizing the oversight between various types of takeovers, could become controversial. It could be viewed as easing the conditions for out-of-state, for-profit hospitals. That seems necessary based on what happened to Tenet, but both Looney and Fasano said that’s not the intent.

Regardless, until something changes, even as community hospitals seek outside partners, few national hospital chains, if any, are likely to seek a merger here. The universe of chains such as Tenet that are expanding aggressively is small to begin with.

And, Fasano said, “The Tenet deal sent the message that outside companies need not apply.”

Malloy To Blame?

One open question is whether Gov. Dannel P. Malloy could have done more to save the Tenet deal. After Tenet left in December, Malloy was persuaded to write a letter to the Tenet CEO, Trevor Fetter, seeking new talks. Those talks did happen, with Malloy’s chief of staff, Mark Ojakian, and Tenet’s senior vice president, Trip Pilgrim.

But Malloy appears to have never gotten directly involved — a step that some say could have saved the deal.

“If Gov. Malloy wanted it to work, it would have worked,” said Karl, at ECHN. “He would have picked up the phone instead of writing a letter and putting it out to the media before Trevor Fetter got the letter. … It’s kind of a no-brainer, if a decision needs to be made by the top player in my organization, I’d pick up the phone.”

The cost of the failed merger was large: ECHN alone spent $4 million on lawyers, accountants, consultants and bankers, Karl said, not to mention an estimated 25 percent of his top managers’ time for two years.

Fasano also attacked Malloy, but Looney defended his fellow Democrat, saying that considering Tenet’s demands for virtually no staffing or service restrictions, “it was not possible to have a positive negotiation.”

Malloy spokesman Mark Bergman declined to respond directly to the charge that Malloy could have done more.

“The governor appointed his top aide who has negotiated major agreements over the last couple years to work with Tenet on this,” Bergman said in an email. “It didn’t work out and we are now working with the affected hospitals, community leaders and other stakeholders on the way forward.”