An ambitious plan to save the ailing Verity Health System has ended in bankruptcy. Hospital CEOs should see Verity as confirming a trend.
The recent bankruptcy announcement by Verity Health System should worry hospital CEOs and boards across the country who share some of the same characteristics because they could be the next to fall, an analyst says.
Verity’s financial troubles are part of a trend in healthcare, and the healthcare system’s experience shows that the dramatic arrival of a deep-pocketed savior does not guarantee the health and stability of the company. organization.
Verity operates six nonprofit hospitals in California and, citing mounting losses and debt for the facilities, it has filed for bankruptcy. Hospitals will remain open during the bankruptcy, Verity said.
Bankruptcy filing a public failure for biotech billionaire Patrick Soon Shiong, MD, a physician and entrepreneur whose private umbrella company NantWorks in 2017 acquired Integrity Healthcare, the company that runs the Verity healthcare system. Soon-Shiong said at the time that her goal was to revitalize hospitals and improve the care they provided primarily to low-income neighborhoods.
Although a surgeon and entrepreneur, Soon-Shiong had never operated hospitals before, as reported STAT. The Verity system’s woes were apparently more than it could solve, with more than $1 billion in debt from bonds and unfunded pension liabilities.
The CEO of Verity said as Soon-Shiong entered the scene that the system also needed money to carry out seismic repairs in aging facilities and also needed hundreds of millions of dollars in new equipment such as imaging machines and neonatal intensive care units.
A definite trend
Verity’s overall experience is part of a trend in US hospitals, says Ilyse Homer, JD, a partner at Berger Singerman law firm with experience in hospital bankruptcies.
“There are hospitals across the country that are no different from what happened to Verity: significant debt, aging infrastructure, inability to negotiate contracts,” Homer says. “They struggle to maintain pensions and that’s very typical in depots in other districts. There are commonalities across the industry, and I can’t say I’m surprised that Verity has come to this.”
Nantworks has provided over $300 million in unsecured and secured loans and investments, the Los Angeles Times reported. The money went to operating costs, pension obligations and capital improvements, and only a third of it was secured by the property.
The management company deferred most of the $60 million in management fees Verity had to pay over the past year.
The industry is ripe for restructuring
Some criticism has been directed at financial decisions by the Soon-Shiong team, like providing millions of dollars to healthcare IT provider Allscripts rather than spending that money on capital improvements. Soon-Shiong holds a financial stake in Allscripts. A full implementation of a new Allscripts healthcare IT system could cost anywhere from $20 million to over $100 million, according to estimates from various sources, as reported by POLITICS.
Even without any questions about Soon-Shiong’s strategy, saving Verity would have been a tall order for any investor, Homer says. The challenges were so great that it may have been too late to just throw in the cash and hope for the best, she says.
Once a hospital or system becomes weak in so many areas, it’s hard to recover and regain strength, Homer says.
“What happened to Verity is happening, to some extent, to a significant number of hospitals across the country. Their costs are rising faster than revenues, and they’re being downgraded by financial analysts,” Homer said. Moody’s recently downgraded the entire hospital sector to negativesuggesting there may be more bankruptcies in the future, she said.
“I absolutely expect to see more on the road,” Homer said.
Big promises are tempting
The healthcare industry, in general, is in flux, and uncertainty in the insurance industry is playing a part in that, Homer says. Struggling hospitals and systems are looking for ways to survive, and the siren song of a billionaire like Soon-Shiong can be irresistible.
“I think this case shows that while you will have individuals and groups who want to come in to save or fix these hospitals, especially nonprofits, it’s not necessarily as simple as adding a sum of money when you have all these other issues that aren’t it doesn’t go away,” Homer says.
Healthcare CEOs should look to Verity to learn from the depth of financial pressures that can build up, Homer says.
“I hope they look at these issues as soon as possible — renegotiating contracts, upgrading systems, securing pension funding — before they reach a crisis point,” Homer said. “Clearly this case is a reminder that it can happen, it can be the end result for your hospital system. [CEOS] must be careful and act on these problems before they go so far that even a huge influx of money will not solve their problems.”
Gregory A. Freeman is a contributing writer for HealthLeaders.