Michael Englehart, president and CEO of Presence Health, is not a doctor. But he’s caring for a sick patient — his hospital chain.
In an unusually frank discussion Wednesday, Englehart said he’s surprised at what he has uncovered since starting Oct. 1. His diagnosis is ugly. Billing and collection failures. Weak internal accounting controls. Outdated technology.
Add it all up and Chicago-based Presence is in critical condition, which was revealed in the company’s annual results, reported Wednesday. The health system’s operating loss plunged to $ 186 million in 2015, from $ 12.7 million the year before. Through the first three quarters of 2015, Presence had posted operating income of $ 40.2 million.
Its deteriorating financial health has consequences. Presence is negotiating with lenders to avoid default, after the wider loss left the health system in violation of its borrowing terms. It’s considering selling assets. It’s cutting jobs in the Chicago area.
With the help of a legion of outside consultants and executive hires, Englehart is working on a cure but expects the recovery to take up to two years. The fix includes increasing prices, cutting labor and supply expenses and improving billing and collections. Englehart estimates those opportunities are worth $ 170 million to $ 255 million in new revenue and cost reductions.
“We have, in our opinion, started to identify all the issues and are now in the fix-and-rebuild mode,” he told bondholders during a conference call.
The troubles, however, come at a time of rapid change and intense competition in the hospital industry that could leave Presence behind. Hospitals are having to make significant new investments in information technology and facilities to improve their clinical care, be more accessible to patients and comply with new regulations. At the same time, they face revenue pressures as more care shifts to physician offices and other lower-priced outpatient settings and government and private insurers demand more efficiencies.
In the Chicago area, Presence is one of the larger health systems with 11 hospitals, outpatient facilities and nursing homes. But it’s competing against better-capitalized networks such as Northwestern Medicine and Advocate Health Care that have large appetites for growth. Even if Presence can squeeze operations to break even, a big question is whether the business can generate enough capital to upgrade out-of-date facilities and grow.
Presence’s predicament also illustrates that the merger of two struggling Catholic health systems has not been a panacea. Mokena-based Provena Health and Chicago-based Resurrection Health Care combined in November 2011 to form Presence. Provena had an operating loss of $ 3 million in 2011. Resurrection, for the year ended June 30, 2011, had operating income of $ 17.8 million, but its hospitals were widely considered to be in need of renovations.
Sandra Bruce ran Presence before retiring last year and being replaced by Englehart. The problems he has found don’t reflect well on Bruce’s leadership.
“I’m not trying to throw anyone under the bus,” Englehart said in an interview. “It’s been an education process.”
He added: “You asked me questions about how this transpired. I would say that we could have been better stewards about controls, about key operations and about being more conservative with our assumptions.”
Efforts to reach Bruce were unsuccessful.
Englehart, 47, is a seasoned hospital executive. He spent more than a decade at Advocate, where he was involved in the leadership of two hospitals and oversaw a network of nearly 5,000 physicians.
The first signs of trouble emerged in December when Presence disclosed its plan to write off $ 53 million of patient invoices or accounts receivable. Englehart blamed the markdown on the untimely filing of bills with insurance companies and understating the difference between standard hospital billing rates and insurance payments.
“We were not doing an effective job capturing accurate information, billing, collecting and following up,” he said.
At the same time, Presence set high estimates for how much it could collect. “Everything was compliant but was on the aggressive side,” Englehart said.
The adjustments for accounts receivable and reserves ended up totaling $ 96 million, according Englehart’s presentation to bondholders.
Englehart also is taking a more conservative approach on medical malpractice matters after reviewing how Presence set aside money for potential liabilities. That led to another one-time hit of $ 44 million.
The cleanup didn’t end there. Englehart made more adjustments to the balance sheet, resulting in another $ 26 million in charges against fourth-quarter earnings.
The substantial one-time hits in the fourth quarter were just part of the problem. Some one-time payments last year under the Affordable Care Act masked monthly operating losses, he told investors.
Presence incurred monthly losses even though the total of inpatient and outpatient visits remained flat compared with 2014, Englehart said.
“This issue is not about losing dramatic market share,” Englehart told investors. “It’s about the execution, the one-time events and day-to-day operations.”
In January, Englehart replaced Presence’s chief financial officer. He also has hired a chief strategy officer, chief operating officer and executives overseeing marketing and sales and physician groups. He lured some of those managers away from Advocate.
At the same time, Vic Orler, a longtime management consultant, was elevated from vice chairman to chairman of the board, replacing Guy Wiebking, Provena’s former CEO, who remains on the board.
On the conference call with bondholders, Orler said Englehart has the complete support of the board.
“He’s done a terrific job of getting through the fog of the business and helping us understand where we are,” Orler said. “I think the board feels we’re on the right track.”
The board has given Englehart permission to see if there is any interest in Presence’s assets, but Orler cautioned that there is no immediate need for “dramatic actions.” Englehart backed him up, saying the company’s balance sheet is “solid,” with roughly $ 1 billion in cash.
“We’re not in a position where we want to burn the furniture here,” Orler said. “I think we want to take our time and look and see what the right things to do are.”
In the meantime, Presence plans to lay off 250 people in corporate and support areas over the next three months, part of plan to eliminate about 700 positions by the end of the year. It also will ask its lenders for waivers on the violations of the lending agreements. One of the terms it breached was missing the Feb. 29 deadline to file its financial reports.
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