Hospital emergency room.
As George Vecchione reaches the four-year mark as president and chief executive of Lifespan this week, there are signs that the state’s largest health system is on a path to financial recovery.
Just don’t tell him that.
The ever-cautious Vecchione appears more comfortable discussing the challenges that loom ahead for Lifespan than the successes that lie in its wake. He concedes that recent efforts to stem the health system’s operating losses might just be bearing fruit. But, he insists, what about dwindling Medicare reimbursement, or the rising cost of prescription-drugs and malpractice insurance?
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"I’m delighted to say that we’re ahead of schedule, although I view it very much as a work in progress," said Vecchione.
Last year, Lifespan – which includes Rhode Island, Miriam, Newport and Bradley hospitals – embarked on a three-year plan to erase its persistent operating losses by the end of fiscal 2004. Lifespan lost about $34 million in both 2000 and 2001, and has been losing money each year since 1997.
Financial results so far in fiscal 2002 (ending Sept. 30) are "well ahead of target," Vecchione said, and it appears that the improvement carries some momentum. The 2003 budget that he will submit to Lifespan’s board next month also reflects that the system is ahead of schedule in its quest to break even.
Although Vecchione declines to discuss interim financial results, unaudited numbers contained in a recent report issued by Moody’s Investors Service, which rates Lifespan’s revenue bonds, seem to support the view of a brightening fiscal picture.
Moody’s cites "recent evidence of stabilizing performance" at Lifespan, in a report issued in May. It says Lifespan’s operating loss for the first half of fiscal 2002 (ending March 31) was $5 million – compared to a loss of nearly $25 million for the same period last year.
As part of its break-even plan, Lifespan tightened its submissions to third-party payers and enhanced contract-management software. The result: Claim denials by insurers and Medicare have been reduced, allowing Lifespan to capture revenue that previously went uncollected, the Moody’s report says.
Vecchione said volume increases across the system also have helped boost revenue, and continued savings from the centralization of services across Lifespan’s affiliate hospitals – purchasing and human resources, for example – have buoyed financial results.
Meanwhile, Lifespan’s effort to eliminate its operating deficit is proceeding
along a dual track with some ambitious capital-improvement proposals.
In June, Lifespan sold $78 million in revenue bonds to fund two projects at Rhode Island Hospital: a new emergency department and cancer center. It also plans $60 million worth of expansions to its surgical suites at Rhode Island, Miriam and Newport hospitals, although those projects still need state approval.
Moody’s assigned an investment-grade rating (Baa2) to the debt, citing Lifespan’s "adequate balance sheet" and its commanding 26 percent market share in Rhode Island, compared with 16.7 percent for its next largest competitor, Care New England. (The bond sale includes only Rhode Island and Miriam hospitals, excluding Lifespan’s other members.)
Still, the report raises a few red flags.
Cash flow remains "extremely weak," with cash-on-hand falling from a 132-day reserve at the end of 2000 to a 90-day reserve at the end of 2001 – below Moody’s national median. And Lifespan’s recent bond sale – which follows $207 million in bonds issued in 1996 – chops its cash-to-debt ratio from 84 percent to 63 percent.
Moody’s concludes that Lifespan has taken on all the debt it can handle for the time being, and says the new debt "will stress the organization further if financial improvement is not sustained." That could pose a problem, the report says, because Lifespan will face paying for the recently proposed expansion of its operating suites through operating profits and fundraising.
Vecchione said Lifespan "agrees 100 percent" with Moody’s assessment that the system has hit its debt ceiling, and says Lifespan has no need to sell additional bonds over the next few years.
But with interest rates at historic lows, Vecchione said the timing was right to issue debt. And Vecchione said he wants to make sure Lifespan doesn’t fall into a "common trap" of other hospitals: failing to adequately plan large capital expenditures.
But no matter how Lifespan trims costs or plans for the future, Vecchione – and Moody’s – says the system’s financial health will not improve markedly unless it receives better reimbursement payments from insurers and federal payers such as Medicare.
Earlier this year, Lifespan spent $50,000 on an independent report aimed at measuring the efficiency of the system’s member hospitals against their national peers. The exhaustive study used two national health-care research firms and three separate databases to compare costs at Lifespan hospitals with nearly 100 comparable teaching hospitals.
"We wanted to compare apples to apples, so we used independent parties to look at national databases," Gillespie said. "The question was ‘Can (Lifespan’s) financial challenges be attributed to our having a less effective group of hospitals, or are there revenue problems?’"
The result: While there is room for improvement, "it’s clear we don’t have a cost problem," Gillespie said.
For example, in one analysis, Rhode Island Hospital was found to have a $1,329 cost per adult inpatient day, ranking it 19th out of more than 70 hospitals studied. Another ranked Miriam Hospital 13th out of 61 peers, with a $1,305 cost per day.
Vecchione said the analysis would be used as leverage in upcoming negotiations with third-party insurers. For the first time in many years, all of Lifespan’s contracts with Blue Cross and UnitedHealthcare expire on the same date, Dec. 31, and Vecchione said contract negotiations would begin soon.
"The ability of payers to pass some of that along to providers I think is appropriate, and that’s what we’ll be seeking."
