Like a family using its savings to ride out a financial tsunami, Jefferson Parish's two public hospitals have regularly tapped their once-vaunted cash reserves in recent years to stay afloat as their income fell and costs rose
Like a family using its savings to ride out a financial tsunami, Jefferson Parish's two public hospitals have regularly tapped their once-vaunted cash reserves in recent years to stay afloat as their income fell and costs rose. Reserves at East Jefferson General Hospital have fallen by 40 percent since 2004, the year before Hurricane Katrina, while West Jefferson Medical Center has used up a quarter of its savings, according to hospital figures.
That's an unsustainable formula, hospital executives said this week, and if unchanged would put the hospitals at risk of violating their debt terms in five years or less. That's a driving force, the executives said, behind their efforts to seek a lease with a third-party network to run the two hospitals.
The public debate over leasing is likely to pick up after Wednesday, when the Parish Council is set to take the first step toward amending an 1992 ordinance that requires voter approval to lease out the hospitals. The council plans to schedule a special public meeting July 10 in Gretna to consider whether to eliminate the public's right to vote on leasing.
The dropping reserves are a symptom of a serious condition: The once-profitable hospitals no longer bring in enough money from patients to cover the costs of providing care and investing in buildings and equipment, officials said. Emergency expenses related to Katrina and its aftermath didn't help the hospital's financial picture. But Paul Sallas, chief executive of the Metropolitan Hospital Council of New Orleans, said the biggest problem is falling reimbursement rates from Medicare and Medicaid.
View full sizeEast Jefferson General Hospital's cash reserves have fallen by 40 percent since 2004. "Many hospitals are using reserves," Sallas said. "And stand-alone hospitals are facing a harder time."
Burning through reserves
Both Jefferson hospitals have been pursuing lease partners for more than a year. Sources close to the negotiations have confirmed that three suitors remain in the hunt: Ochsner Health System, Louisiana Children's Medical Center and the Nashville, Tenn.-based hospital giant HCA, which runs Tulane Medical Center and Lakeside Hospital. (See background on the suitors.)
West Jefferson's CEO, Nancy Cassagne, and her counterpart at East Jefferson, Dr. Mark Peters, both have alluded to their hospitals' dropping reserves in explaining the negotiations at public forums. East Jefferson General's cash reserves stood at almost $224 million in 2004 but dropped below $133 million in 2012. The fall has been less dramatic at West Jefferson Medical Center, from about $198 million in 2004 to about $150 million last year.
Cassagne and Peters said this week that their hospitals have been hit hard by falling reimbursements from Medicare and Medicaid, the federal and state programs that provide health care for elderly and low-income people.
Medicare once reimbursed hospitals the full cost of care, in what Peters called "the good old days." Reimbursements began falling in the mid-1980s, Cassagne said, as Medicare "began tightening its belt." Rates dropped between 2 percent and 4 percent this year because of automatic budget cuts at the federal level and policy changes brought about by President Barack Obama's health care reform.
View full sizeWest Jefferson Medical Center has spent 24 percent of its savings since 2004. In downgrading East Jefferson General's bonds in March, Moody's Investor Service said Medicare accounts for 59.5 percent of its gross patient revenue, "one of the highest in the Moody's portfolio."
Medicaid is administered by the states, and in Louisiana reimbursement rates have fallen by 26 percent since early 2009, Sallas said.
The problem is not just the shrinking reimbursement rates. The Jefferson Parish hospitals, like most U.S. employers, have seen their cost of insurance and other benefits rise rapidly, while they continue to require substantial expenses in infrastructure and equipment to stay competitive, hospital officials argued.
To pay for capital improvements, the hospitals use cash reserves even in years in which they show an operating profit. West Jefferson Medical Center, for example, broken even or made money in six of the past 10 years. But the hospital still used reserves to pay for some or all of $17 million to $24 million spent on buildings and equipment during each of those six years.
"We have to make those investments to stay competitive," Cassagne said.
Risking default in five years or less
At this pace, the hospitals would eventually deplete their reserves. But even before then, they could run into serious problems, executives said.
Loan requirements at both hospitals demand they keep a certain number of so-called "days cash on hand," or enough money to pay for operations if they were to lose all other income.
Cassagne said West Jefferson must keep 100 days cash on hand. It had 226 days in 2004 but only 153 by 2012. Cassagne said at the rate the hospital is using its reserves, it could fall below 100 cash days by 2016.
Peters said East Jefferson's lenders require 60 days cash on hand. The hospital had enough reserves to run for 314 days in 2004 but by 2012 had only enough for 137 days. Peters said East Jefferson would reach the 60 days mark in five years or less.
If either hospital violates its respective cash days threshold, it would face a downgrading of its bonds by rating agencies, hurting their finances, at the very least. At worst, hospital executives have warned, bondholders could force the hospitals to adopt drastic cost-cutting measures or sell assets to pay the bonds.
"If you fall below the required days cash on hand, you'd have defaulted on your bond obligations," Cassagne said.
The financial problems of the hospitals are theirs alone, however. They would not affect the bond rating and financial health of parish government, said Bill Becknell, the parish bond attorney. He said the hospital districts that voters approved decades ago to pay for the health-care buildings are separate entities under the law, without the parish being responsible for the debt if the hospitals default.
Peters and Cassagne said the lease agreement they're seeking for the hospitals is intended to prevent a default. Without a lease, Peters said, the hospitals would likely start cutting services before cash reserves drop to dangerous levels.
"But these questions are the driving force why we're looking at partners," Peters said. "We're trying to address this before we cut services."