In an affidavit filed with his hospitals”™ recent Bankruptcy Court petition, Sound Shore Health System President and CEO John Spicer laid out a scenario of financial pressures ”“ mounting pension obligations and other debts, liens and judgments, declining reimbursements, negative cash balances and balking vendors and lenders ”“ that led to Sound Shore”™s pending acquisition by Montefiore Medical Center in the Bronx. Though the details might differ, his account from New Rochelle and Mount Vernon could be an outline for other ailing New York hospitals exploring merger or acquisition as a way to keep their doors open for patients in the months and years ahead.
A growing employer in Westchester County with its $33 million purchase of the former Kraft Foods beverages research and development center in Tarrytown, where it plans to move about 850 nonmedical jobs this year, Montefiore will be a major health care provider in the county when it takes over Sound Shore Medical Center and Schaffer Extended Care Center in New Rochelle and Mount Vernon Hospital from Sound Shore Health System.
The deal, which required Sound Shore to file for Chapter 11 bankruptcy protection, is expected to receive U.S. Bankruptcy Court and state Health Department approval by the end of this year.
Sound Shore Health System has about 1,200 workers, including 165 physicians affiliated with its two community hospitals. Dr. Steven M. Safyer, Montefiore president and CEO, in the purchase announcement said the medical center looked forward to working with Sound Shore”™s doctors, nurses and staff to provide “exceptional care close to home” for the New Rochelle and Mount Vernon communities.
Still, the buyer in the purchase agreement stipulated that current Sound Shore employees will be offered employment on a probationary basis under terms and conditions established by Montefiore “in its sole discretion.” Employment will not be offered on the terms of Sound Shore”™s collective bargaining agreements with two union locals that represent about 1,200 workers at the two hospitals.
One of Sound Shore”™s current lenders, Midcap Financial L.L.C., will provide $33 million in debtor-in-possession financing to keep Sound Shore facilities operating until the deal closes.
Montefiore will pay a purchase price of $54 million, in addition to the appraised value of furniture, equipment and inventory at Sound Shore facilities. Much of the payment will be applied to Sound Shore liabilities that the buyer will assume.
Spicer in his affidavit said the Sound Shore system ended 2012 with assets valued at $159.63 million and liabilities of approximately $200 million. Its operating loss last year was $16.35 million on $241.83 million in revenues. In 2011, Sound Shore”™s operating loss was $9.9 million on $243.31 million in revenues.
The financial pressures that beset Sound Shore in recent years are shared by many community hospitals that serve a working-class population, Spicer said in the affidavit. He attributed those pressures to cuts in Medicare and Medicaid funding, declining payments from the state”™s indigent care pool and changing demographics in the communities served by Sound Shore. The hospitals serve a disproportionate share of Medicaid and uninsured patients, said Spicer, noting they have 35,000 emergency room visits and 60,000 indigent care clinic visits annually.
Starting in 2006, Spicer said, patient volume and discharges progressively declined and the hospitals saw a reduction in serious illnesses among patient cases. As operating revenues and losses mounted, “Cash book balances were frequently negative and vendor payables increased to over 225 days past due.”
Sound Shore”™s conversion to an electronic medical record and billing system in 2011 resulted in multiple problems that still have not been fully remedied, Spicer said. The botched conversion caused major delays in billing and cash collections, which led to more financial losses and expenses to resolve the problems. The hospitals relapsed into a “liquidity crisis” and some long-unpaid vendors terminated their services.
Driven by the deteriorating financial condition, Spicer said Sound Shore officials last summer retained a troubleshooting financial consulting firm, Alvarez & Marsal, and began the search for the strong health care partner needed by the hospitals “to maintain operations and their charitable mission, achieve administrative efficiencies and reduce overhead costs, attract and retain quality physicians, gain increased access to much needed capital, make necessary capital improvements and implement long-overdue technological upgrades.”
State Health Department officials required an “active parent arrangement” where the buyer would commit substantial financial support to the transaction and the ongoing system in New Rochelle and Mount Vernon. That limited the pool of likely partners, Spicer said, as did New York”™s not-for-profit hospital structure, which excluded almost all out-of-state prospects, which largely operate as for-profit institutions.
Though Westchester County Health Care Corp. (WCHCC), the owner of Westchester Medical Center in Valhalla, was at the start considered the most likely candidate as the only hospital in the region with the “financial ability, experience and strategic design” to take in the Sound Shore medical centers, Sound Shore also approached Montefiore, North Shore-LIJ Health System and New York University Medical Center. The nonprofit Yale-New Haven Health System in Connecticut was the only out-of-state prospect contacted.
North Shore bowed out early, saying the Westchester market was not a priority in its long-range plans, and NYU and Yale also opted out, Spicer said. Sound Shore officials chose to pursue negotiations with WCHCC because officials there wanted to close the deal without a bankruptcy filing.
Spicer said those merger talks ended after several months of negotiations because the parties were unable to agree on a “sufficient” purchase payment.
Less than a month after Westchester Medical Center announced the end of negotiations in early May, Montefiore and Sound Shore jointly announced their acquisition deal.
