Steward Health Lost $14.6M in 2011

Boston-based Steward Health Care System posted an operating loss of $14.6 million in 2011 and ran a total deficit of $56.9 million for the year, according to a report from Massachusetts Attorney General Martha Coakley's office.

However, the for-profit system, which is owned by the private equity firm Cerberus Capital Management, obeyed mandates set down by state regulators before they approved Steward's November 2010 acquisition of the six hospitals owned by non-profit Caritas Christi Health Care, according to the 70-page compliance monitoring report.

State monitors do not appear to be overly concerned about the red ink in Steward's first year of operation.

"The review reinforces previous findings that Steward acquired community hospitals in deteriorating financial condition and with significant deferred capital investment needs," the report says.

"The first year review indicates that Steward is striving to meet its stated goal of keeping more care in the community. One year of performance information is not enough to predict how Steward will perform in future years."

The AG's review also found that:

• Even though outpatient volume generally increased, profits overall declined from FY10 because expenses outpaced revenues.
• Steward spent heavily on capital improvements and hospital and physician acquisitions. To support this spending, the system supplemented the initial Cerberus investment of $246 million with a revolving bank line of credit, under which it had borrowed $96.3 million as of the close of FY11.
• Steward's financial condition, even more so than Caritas's, is complicated by special expenses such as necessary contributions to its significantly underfunded pensions and its commitments in connection with its provider acquisitions. It will be important to monitor how these expenses affect Steward's long-term financial performance.

Healthcare economist Adam Powell, president of Boston-based Payer+Provider Syndicate, says the first-year losses were anticipated. 

"Steward Health Care has built its business model around acquiring financially struggling hospitals. Substantial changes are needed to bolster the financial strength of the hospitals that it has acquired. While Steward is in the process of weaving its newly acquired hospitals into a system that can deliver value in part through economies of scale, it is still a work in progress," Powell wrote in an email exchange with HealthLeaders Media.

"Building shared assets, like the centralized ICU command center mentioned in Atul Gawande's article in The New Yorker, requires substantial capital expenditures. These shared assets have high upfront costs, but also have the promise of boosting profitability in the future. It is impossible to change processes or culture on a dime and some investments will take time to fully implement."

Because Steward is focusing on value, Powell says, it can only deliver on that promise by efficiently delivering care at a lower price than its competitors.

"This market positioning limits Steward's ability to improve its profitability by raising prices, and instead requires it to work on reducing costs and increasing volume. Neither of these changes can happen overnight," he says.

As Steward Health Care is still in the early stages of its development, Coakley is prudent in her assertion that it is too soon to draw any conclusions about Steward's future financial performance.