Byline: KRISTEN SCHORSCH
New buildings used to be a time-honored way for hospitals to increase revenue, but some suburban hospitals are finding that state-of-the-art structures aren't the gold mines they had expected.
Elmhurst Memorial Healthcare opened a $450-million hospital in June but is in merger negotiations with Northwestern Memorial HealthCare. The new $325-million Sherman Hospital in Elgin opened two years ago and its parent system has held talks with several networks, including Oak Brook-based Advocate Health Care. The trend highlights the fight for independence facing Joliet's Silver Cross Hospital, slated to open a $370-million facility in nearby New Lenox next year.
These hospitals combined carry almost $1.3 billion in long-term debt, most of it incurred to finance glitzy new buildings. Even as the boom began, the health care industry was changing: Patients who once filled hospital beds are visiting out-patient clinics or primary care physicians instead. Health insurance companies and Medicare continue to cut reimbursement rates while the costs to adapt to the federal overhaul of health care reform mount.
Independent suburban hospitals with major construction projects have become targets in a consolidation wave, experts say. Big networks like Advocate or Northwestern have lower operating costs and stronger balance sheets.
'For the first time in my career, senior health system executives are scared that their vision of the future may not align with where the market is going, and that concern is fueling a lot of these consolidation discussions,' says David Johnson, a managing director at Chicago-based BMO Capital Markets Corp.
Sherman Health Systems debuted its 255-bed building in December 2009. The northwest suburban hospital is burdened with nearly $300 million in long-term debt.
Sherman's total revenue increased by 19%, to $292.5 million, in the fiscal year ended April 30 from the 2008 fiscal year. Operating profit margin, which plunged to -15.7% in the quarter ended April 30, 2010, has risen, but was still -2.2% in the quarter ended July 31.
Sherman's cash-to-debt ratio was just 25% on July 31, compared with 24% on Dec. 31, 2010, when Moody's Investors Service said its cash position and ability to make bond payments was 'exceptionally weak.'
The ratings agency also cited Sherman's improving performance and dominant marketshare.
Sherman and McHenry-based Centegra Health System broke off merger talks earlier this year. Sherman also has had discussions with Advocate, although a deal is not close, a Sherman spokeswoman says.
'Now our hospital is doing fine financially,' she says. 'Certainly, we've had our challenges.'
In the western suburbs, Elmhurst Memorial took on nearly $507 million in debt, mostly to finance its new 259-bed campus.
Elmhurst Memorial reported a nearly $24-million operating loss for the fiscal year ended June 30, compared with income of $12 million the year before. In October, the hospital confirmed that it was in negotiations with Northwestern.
In a memo, CEO W. Peter Daniels cited 'the increasingly challenging financial environment' as a reason for the deal. But the Northwestern brand also is key, says Alex Bacchetti, vice-president for marketing and business development at Elmhurst Memorial.
'I don't want to downplay completely the financial side of it, but we haven't gone into this saying, 'Gosh, we built this new hospital. We need a financial savior,' ' he says.
In the south suburbs, Silver Cross carries $404 million in debt, much of it spent on a 289-bed hospital that opens in February.
'Silver Cross has a limited financial cushion at a crucial period when the new facility is ramping up,' Fitch Ratings said in a report last month. But the hospital has strong cash flow, it said.
Silver Cross' plan to preserve its independence includes partnerships with institutions such as the University of Chicago Medical Center, says Ruth Colby, senior vice-president and chief strategy officer at Silver Cross.
'We understand what it means to take on debt,' Ms. Colby says. 'We understand what's going to happen when we move in. We're ready for all of it.'
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