Connecticut’s Sharon Hospital mulls allegiances, profit status | Crain's Connecticut

Connecticut’s Sharon Hospital mulls allegiances, profit status

Sharon Hospital is headed toward an acquisition by a larger, New York-based entity in order to attract more medical specialists and patients. The 107-year-old facility, which was Connecticut's first for-profit hospital, is also considering rejoining the Connecticut Hospital Association. | Photo courtesy of Sharon Hospital

Sharon Hospital is considering rejoining the Connecticut Hospital Association as it moves closer to a merger that would end its pioneering for-profit status and return it to the nonprofit ranks.

If Sharon resumes membership, all of Connecticut’s 28 acute-care hospitals will stand together in CHA, association spokesman Michele Sharp said. Sharon Hospital administrators and association representatives have a meeting scheduled for Thursday (Dec. 1), said Peter Cordeau, Sharon’s president and CEO.

The meeting was set up to discuss quality initiatives although the subject of membership may come up, Sharp said.

Sharon collaborates in many CHA initiatives as a non-member at the invitation of the Wallingford-based association, Cordeau noted. The initiatives have included the Hospital Improvement Innovation Network, which works to improve patient safety and streamline practices associated with Medicare.

Cordeau characterized this week’s meeting as “the first step” toward rejoining the association, which Sharon left several years ago. Cordeau said he didn’t know the reasons for the exit, which predates his tenure as CEO. He became the Litchfield County hospital’s chief executive three years ago.

Hospital finances

Sharon was Connecticut’s first for-profit hospital and has been for-profit for close to 15 years. The hospital is preparing to convert to a nonprofit through its $5 million acquisition by New York-based Health Quest Systems Inc. Sharon’s fiscal year 2015 total financial margin was negative 57.10 percent, the worst in the state, according to records on file with the Connecticut Department of Public Health. Total revenue was $143.6 million, according to the department’s website.

Inpatient discharges at Sharon have fallen 16 percent between fiscal 2013 and 2016, according to the merger regulatory filing, while the number of inpatient surgical cases has dropped 22 percent since fiscal 2014.

Joining a larger entity will bring more financial resources and increase 78-bed Sharon’s ability to attract more medical specialists, according to an executive summary filed with Connecticut regulators as part of the merger. A “significant” injection of capital is to be made in Sharon Hospital over the next four years, Cordeau said in discussing the regulatory filing.

Acquisition terms include a $9 million grant that will put $3 million toward the purchase price of the hospital and its associated physician practices with the remaining $6 million to be distributed three or four years after closing on equipment, facilities and other upgrades, the filing states.

Geography played a role since Health Quest is based in nearby New York, with Sharon sharing the service area with two Health Quest hospitals that include Northern Dutchess Hospital and Vassar Brothers Medical Center.

Sharon, founded in 1909 and with a staff of 450, is currently part of Tennessee-based RCCH HealthCare Partners. It is RCCH’s only hospital in the Northeast.

Changing landscape

Having a nearer, large partner during a time of great industry change is critical, Cordeau said.

“It’s all about the changing healthcare system,” he said. “It is very difficult to have long-term survival without being part of a system. System consolidation locally offers a brighter future for Sharon long term.”

The merger’s certificate of need application was filed with Connecticut regulators on Nov. 3. The regulatory process is expected to take six months to a year, Cordeau said.

Sharon Hospital is conducting “business as usual” and beginning preliminary discussions on integration, Cordeau said. Conversion to nonprofit status occurs through the state’s certificate of need process, he said.

High fixed costs and excess capacity means that Sharon Hospital can grow without adding significant expenses, Cordeau said. The high costs result in part from having to staff units that sometimes have no patients, he said.

Connecticut’s hospital landscape has historically remained nonprofit.

Sharon is leaving the for-profit ranks at a time when Waterbury Hospital, another western Connecticut hospital, and its associated health network has gone for-profit through its $100 million acquisition by California-based Prospect Medical Holdings Inc. The conversion was completed Oct. 1, said Patricia Charvat, Waterbury Hospital spokeswoman.

Manchester Memorial Hospital and Rockville General Hospital were also acquired by Prospect Medical Holdings through the $105 million purchase of their parent company, Eastern Connecticut Health Network, and have converted to for-profit, Sharp said. Prospect owns 18 hospitals in several states including Rhode Island and New Jersey.

Comparing urban Waterbury and rural Sharon isn’t appropriate, Cordeau said, calling them “drastically different communities.” Sharon became Connecticut’s first for-profit hospital through its 2002 acquisition by Essent Healthcare Inc., which was then a for-profit entity.

The tax role

Becoming for-profit subjects a hospital to greater tax liability, including corporate income taxes and property taxes. Pools of available capital, however, are generally larger in for-profit systems, said Zachary Janowski, external affairs director at the Hartford-based Yankee Institute think tank. Janowski also authored a 2015 institute paper about Connecticut hospital ownership trends.

But even nonprofit Connecticut hospitals have become subject to taxation due to the so-called hospital tax that took effect five years ago. The Connecticut Hospital Association and 24 hospitals filed appeals with the state departments of Revenue Services and Social Services last year to overturn the levy, which taxes net revenue at 6 percent. The departments upheld the legality of the tax in September, prompting the hospitals to go to court.

An answer from the court could come within 90 days, said Stephen Frayne, the hospital association’s senior vice president for health policy.

The administration of Gov. Dannel P. Malloy pushed the tax amid a budget crisis, saying provisions for taxing and redistributing money back to the hospitals would draw more U.S. government matching funds through the Medicaid program. Hospitals have fought the measure on state and federal constitutional grounds, saying that the tax is driving up healthcare costs and thinning hospital staffs and services.

“We’re optimistic,” Frayne said when asked the likelihood that the issue would be resolved to the association’s satisfaction.

Yale-New Haven Hospital, the state’s largest hospital with $8.7 billion in fiscal 2015 revenue, along with its system affiliates across the state withdrew from the group challenging the tax, although those hospitals remain part of the association, Sharp said.

Frayne said he had no comment on the move by Yale-New Haven and its affiliates.

Yale-New Haven is continuing to talk to the governor’s office about possible solutions, according to Vin Petrini, senior vice president of public affairs.

“Our decision to withdraw the litigation was predicated upon the fact that we have been working in a collaborative fashion with the administration to see if we can find common ground to address longstanding challenges in the state’s Medicaid program,” he said. “We are optimistic that by exploring innovative approaches we can address hospital needs while securing the long-term viability of coverage for the state’s most vulnerable patients.”

The tax is not a major factor in hospitals deciding whether to be for-profit or nonprofit, or in merger considerations, Frayne said. Local challenges and opportunities play much larger roles, he said.

“They’re not fixated by the hospital tax,” Frayne said. “Hospital people are on the ground on a daily basis. There are lots of forces out there.”

Connecticut hospitals will continue to manage regardless of whether Obamacare is repealed, replaced or left as is, Frayne said. The association doesn’t have a position on whether Obamacare should continue or what portions should be done away with.

“We’re supportive of people getting the affordable care that they need to maintain their health,” Frayne said.

November 30, 2016 - 12:10pm