Is It Ever Acceptable for a Hospital to Close? Hahnemann's Story

This transcription is provided by artificial intelligence. We believe in technology but understand that even the most intelligent robots can sometimes get speech recognition wrong.   Today in Health it, this story is the Death of Hahnemann Hospital. My name is Bill Russell. I'm a former CIO for the 16 hospital system and creator of this week in Health IT a channel dedicated to keeping health IT staff current and engaged. We have no show sponsor for today, so if you're listening to this, you know the Power of Podcasting. Our show continues to grow every week and we are really grateful For those of you who are listening. And for those of you who are thinking about sponsoring, if you wanna get your message out to a targeted healthcare audience, go ahead and send an email to partner at this weekend, health it.com. All right, here's today's story. This is from the New Yorker. We'll actually go to print this weekend. It was published online on Monday, the death of Hahnemann Hospital, when private equity firm bought a Philadelphia institution. The most vulnerable patients bore the cost, and this is a really long article. So what I'm going to do is skimm a fair amount and just give you. A synopsis of some of the things that are happening more so at the end than the beginning. 'cause I wanna set it up well. And so let's do some excerpts to give you the background. Hahnemann took care of people that no one else wanted to. A doctor said. Leah Logio, L-O-G-I-O arrived at Hahnemann Hospital in Philly in March of 2018. Two months after it was sold to a private equity firm logo. An internist had come from Weill Cornell. In New York, a prestigious and well-funded nonprofit hospital where she was Vice Chair. Hahnemann served mostly low-income patients, but it had a range of medical subspecialties and was the primary teaching hospital used by Drexel University's College of Medicine. It felt like they had all the ingredients to do something innovative and creative. Lo GI said not long ago. It seemed like an opportunity to have an economy of scale, to do coordinated care for poor complex patients, which usually doesn't happen very well. Philadelphia is one of the poorest big cities in the United States with about a quarter of its 1.6 million residents living below the poverty line. Since 1977, it has also been the largest American city without a public hospital Hahnemann with nearly . 500 beds occupied a city block on the edge of North Philadelphia, an area that includes several impoverished neighborhoods. A majority of the more than 50,000 patients that the hospital treated each year had publicly funded medical insurance. Or none at all. Two thirds were black or Hispanic. Alright, so that's the background. That's the setup for this because Hahnemann treated so many poor patients. It had significant financial difficulties, but patient outcomes rivaled those of practically any hospital in the country. And the people who worked there were driven by a sense of mission. The doctors said, Hahnemann. We're there because they wanted to be there. Logio said Hahnemann took care of the people that no one else wanted to take care of. So to set this up a little further, this is the New Yorker. This is sort of like the Saturday evening post. They're gonna use a ton of anecdotes, a lot of interviews, a lot of people's opinions and thoughts about what happened and those kind of things. It goes on logeo regarded for-profit medicine with deep skepticism. But her new colleagues made her hopeful. Everyone had this tremendous sense of positivity. Looking toward the future with the new owner, she said Hahnemann and another medical center, St. Christopher's Hospital for Children had been acquired for $170 million by American Academic Health System, a company controlled by the California private equity firm, Paladin Healthcare Capital. Joel Friedman, the founder and CEO of Paladin, had managed a sizable hospital in Washington DC. And a few smaller ones. In LA he seemed earnest about his commitment to Hahnemann buying a large townhouse in Philadelphia and moving there with his wife and children. Alright, so that's your villain. Your villain is for-Profit Medicine, and your villain is Joel Friedman. Just to move along a little quicker here, you have some stories of unfulfilled promises from Freedman and the supporting cast is, uh, private equity firms and uh, for-profit companies and those kinds of things. All right, let's go on. In May, 2018, the hospital held a banquet in Logan Hotel near the Philadelphia Museum of Art. Some 200 doctors went to hear the new owner speak. Joseph Belli, a 61-year-old internist who had been at Hahnemann for more than 30 years, and who was now the president of the medical staff introduced Freeman. This was the first time that many people had seen him in person. Belli recalled, I told him, Joel, keep it short and sweet, but Friedman talked for about 30 minutes, evidently displeased with the financial condition of his new acquisition. He sought to blame the physicians who made up his audience. He goes on and on about how he doesn't think doctors aren't doing their job. Belli said. That they're not training residents. Well, not seeing enough patients. All right, so they paint him. He's the bully. But you know what? Hope persists still the medical staff hope that Freedman would provide the funding Hahnemann needed to survive. So it goes on and uh, here we start talking about the victim. The victim is hospitals. Are under attack. All right, so hospitals in the US are estimated to be closing at a rate of about 30 a year. Most closures happen for financial reasons. In places where there are relatively few privately insured patients. Increasingly hospitals are registered as businesses like any other. At least a fifth of hospitals are now run for profit and globally. Private equity investment in healthcare has tripled since 2015. Last year, some $66 billion was spent on acquisitions, the industry's movement into healthcare. I. Has been linked to the price hikes, an increase in unnecessary procedures and the destabilization of healthcare networks. The bad actors of private equity are sometimes accused of destroying American healthcare, but they are more symptoms than disease. The story of Hahnemann is as much about the structural forces that have compromised many American hospitals, stingy public investment, weak regulation, and a blind belief in the wisdom of the market. As it is about motives of private equity firms. All right, so there's your victim. Your victim is the hospital. So this is all happening to them. Not enough government money is coming in that direction. There's not enough regulation, especially on these owners and, and the things that they're doing, and, uh, we're allowing the market to wreak havoc amongst the hospitals. I, I, I also find it interesting, one fifth of hospitals now being run for profit is . It's still a really low number. I mean, one fifth, 20% of hospitals are . For-profit hospitals, that means 80% are not-for-profit hospitals, and I'm not sure that makes them any more altruistic, not-for-profit hospitals have also done acquisitions which have led to higher cost. The next section is about how the hospital motives are pure. The idea that hospitals should turn to profit is somewhat recent. Pennsylvania Hospital, which was widely considered the oldest in the country, opened in Philadelphia in 1752 Co-founded by Benjamin Franklin, it was conceived as a place for the reception and cure of the sick, poor. And an example of that, until the late 19th century, almost all American hospitals followed philanthropy and taxes in the cases of public hospitals like Bellevue and New York, which opened in 1795, covered costs and care was provided for free. All right, so the hospital motives are pure, but that all changed. Right. Healthcare changed, and Hahnemann was a leader at this point. So the next couple of paragraphs essentially talk about how hospitals changed from 1861 on, we had germ theory, we had sanitation, we had new procedures and those kinds of things that came into being, and Hahnemann was a leader. In 1957, a Hahnemann cardiac surgeon named Charles Bailey appeared on the cover of time after he'd completed a groundbreaking surgery to correct an abnormality. Of the mitral valve. Bailey attracted patients from around the world, was one of a number of Hahnemann physicians working at the medical vanguard of specialty procedures in 1958, and Hahnemann administrator noted that Bailey and his team brought in some. $800,000 in a year and I'm sure adjusted for inflation, that would be a significant number. Alright, so healthcare has changed. Hahnemann is a leader, but in the decades after the Second World War, the cost of hospital care rose significantly spurred on by expensive procedures like Bailey's and by the adoption of medical insurance, after the government began to offer tax breaks for employers. Who paid for their workers' health benefits. The number of insured Americans grew to more than 60% of the population. And in 1965, the bill establishing Medicare and Medicaid passed further increasing the number of patients seeking care guidelines dictated reimbursement for reasonable costs, which for years amounted to pretty much. Whatever providers said they were and for-profit hospitals sprang up to capitalize on the boom for-profit hospitals. Arrived in Pennsylvania in 1998. Tenant healthcare based in Dallas, owned 120 hospitals in 18 states. I. And that November, the company bought Hahnemann out of bankruptcy along with St. Christopher's and six other area hospitals. We promised we will be there for the long haul. Michael Folk, F-O-C-H-T tenant, COO said at a ceremony held at Hahnemann. This is not a short-term visit. Okay? So this is interesting to me in that somehow we skipped the years from 1958 to 1998. When Hahnemann was in bankruptcy, this is where we picked the story up, where the real villains of this story take over. Don't get me wrong, the villains of this story don't do Hahnemann any favors, but they picked up a hospital that was in distress and so that's to be noted. They, they bought a hospital in bankruptcy. All right, so eight years later, tenant agreed to pay nearly $900 million in fines to the Justice Department. This is where it gets bad. So this is the event that leads to just a complete downfall here. Greed of the for-profit system. All right, so they get caught in excessive Medicare billing, a scheme, kickbacks to doctors, exaggerated diagnosis and whatnot. And so they had a significant fine to pay, and as a result, they started to reduce their costs across the board. And Hahnemann is painted as one of the hospitals that took a big hit here. They did not upgrade the infrastructure. They did not upgrade the equipment, and they didn't do the necessary investment that's required. And as we know, healthcare is very . Capital intensive. Alright, so then the, the story goes on to Joel Friedman who was steps in as a CEO. He makes the acquisition as Paladin and he had some success turning around health systems and wanted to replicate it, right? So Paladin, I. Had worked with Howard University Hospital in Washington DC and had turned that around from a significant loss to a profit and had done the same thing in LA Hospitals. They paint him as a proud man. As a vain man, there's a lot of anecdotes in here of him saying some things that, you know, he's beating his own chest and saying, look at me. How, what a great philanthropist and, uh, wonderful person I am. So, again, a lot of anecdotes. I don't know this person from Adam. This is what they're painting as a picture. The next section paints a picture. When his plans didn't work out, he started to become a bully of a manager. He started saying things that were rude, saying things to people like, you have no idea what you're talking about. Amongst other anecdotes, which get actually worse from there. When he got stuck, he called consultants. Who couldn't figure out what was going on either, right? So this was part of the sucking the life out of our hero Hahnemann hospital. And this sort of cracks me up, so I'll go ahead and share it. Joel had a 20 week relationship with consultants, a former Hahnemann executive, said the first eight, you're a rockstar in the middle. You don't hear from him the last eight weeks. He goes on to say, you're a nice guy, but I need a rockstar here. And he probably did need a rockstar, quite frankly, 'cause this was a very challenging situation. So they go on to paint the picture again that the staff had great ideas, which were ignored while the keystone cops of leaders and consultants made changes that indicated that they didn't really understand the complexities of AC academic care. And in the interest of time, I'm just gonna skip some of those things. Just suffice it to say they made changes to the er, which really bungled things and slowed things down. Alright, so the story goes on. So building out a referral network was the last hope. At this point, it's important to note that Philadelphia is loaded with academic medical centers. The doctors in Philly have choices. Jefferson, Penn Temple, among others. And the story goes on to talk about this. So since 2008, American hospitals have been involved in more than a thousand mergers and acquisitions, resulting in large powerful health systems with influence on the price of hospital care and reimbursement rates paid by private insurers. These conglomerates generally make up the losses incurred treating poor patients by building referral networks that attract privately insured patients seeking specialized care. Alright, so it's time to build out that referral network. Tenant drew few referrals as Jefferson and Penn Health Systems cultivated satellite hospitals, physician practices, and urgent care centers, including those in wealthy suburbs. On Mainline and South Jersey, so there's the one sentence that mentions competition, but the remaining tells colorful anecdotes around how bad Freeman was at negotiating. With the potential referral partners and payers. Uh, so our villain is a bumbling, finger pointing and name calling fool, but he also is an evil genius, right? So here's where it gets interesting. Midcalf Financial, the Apollo affiliate provided Freedman's Group A A HS with two loans representing a commitment of $120 million. The loans had nine and 10.5% effective interest rates significantly steeper than most commercial bank loans, and were secured by mortgages on Hahnemann's real estate. All right, so real estate keep this in mind because the story only gets worse from here and it gets really bad from here. So. It gets bad, and they got the residency program. They start closing floors. They did drastic measures to avoid filing bankruptcy. Story goes on. Any savings proves insufficient. In early May, A A HS received a notice of default from Midcap Financial. In the next seven weeks, Freedman and his executives met with the city and state officials to try to find a way to keep Hanaman afloat. Freedman hoped that the government would provide emergency funding or that Drexel would buy the hospital. But according to government officials, they never received the details about the hospital's financials that they needed to determine how to address its operating deficit, which Freedman estimated at between 3 million and $5 million per month on June 30th, Hahnemann St. Christopher's, and several related entities filed for bankruptcy. A longtime Hahnemann physician says that Friedman told her, my wife turned the faucet off. She said, no more. We're not losing any more money, Joel. And Freedman does not recall saying this. We'll just call this the final anecdote. Don't hear me defending Freedman. At best, he was an ineffective leader. At worst, he was an arrogant and bully, amongst other words that this article freely implies. Let me close this out. I. So what story would be complete without a Bernie Sanders sighting? All right, so Bernie Sanders sits up outside of Hahnemann and has a rally or an event, and he says this, if an investment banker like Joel Friedman is able to shut down Hahnemann and make a huge profit by turning this hospital into luxury condos, he said, I. It will send a signal to every Vulture fund on Wall Street that they can do the same thing in community after community. After community, Sanders was expressing what had become a widely accepted theory from the beginning that thinking went, that Freedman's purchase of Hahnemann had been deployed to acquire the land on which it stood situated steps from City Hall. And the convention center, the real estate had skyrocketed in value. The mile and a half stretch of North Broad between Hahnemann and Temple University in North Philly had long been run down, but now developers were building luxury condos and rentals, and it goes on to talk about what that was all about. So yes, he's an evil genius. He wanted the real estate and he got the real estate. The deal was written so that the real estate did not go into the bankruptcy proceedings. It actually went to the creditors that had secured the funding, the $120 million, and it will likely become luxury condos. Friedman points finger at a firm and accounting and consulting firm that was brought in towards the end. That it was them that really precipitated the, uh, bankruptcy, which at this point was a foregone conclusion. And it has a bunch of stories about where the, the patients go, right? So, uh, temple and Pennsylvania Hospital soon saw their ER volume increase by about 12%, while at Jefferson, only a mile from Hahnemann volume, climb by 20%. Adding almost 1200 visits a month. And here's the one that just boggles my mind. Most Philadelphia hospitals use an electronic record. Sharing system, but Hahnemann had never taken part in it. Once the hospital closed, doctors at other medical centers had difficulty obtaining records for Hahnemann patients. There were patients who had complex social histories who were receiving many kinds of subspecialty care. London said they'd lost heart doctors, kidney doctors, and ended up in our emergency department. We had to understand as best we could. What was going on with them, and in the final paragraphs, this is the last insult, the author of the story talks about when I spoke with Freedman by phone last summer, he returned to California where he had bought a new 8,000 square foot house south of Los Angeles. With 20 foot ceilings and a stone spa for nearly $7 million. He was in the midst of two lawsuits with tenant healthcare, which he believes misled him about Hahnemann's financial situation. Friedman estimates that he has personally lost about $10 million on the Hahneman deal. He was asked to step down from his board position at the University of Southern California, which he says really hurt him. But St. Christopher's Hospital had been sold for $50 million, and midcap Financial had been repaid in full. Now, Friedman was trying to reinvent himself as we spoke. One afternoon there was an audible breeze on Friedman's end of the line. The family's multi snow barked in the background. Freeman's confidence was. Undimmed, I'm working on some things that I think could be meaningful. He said, I would like to go back to working in healthcare someday. I have a lot of knowledge. I've seen a lot of bad things. Unfortunately, the solutions demand a lot of capital. Alright, so that's the story. Why do I share that story? You know, because it creates a question for me and a question that I'm, I'm struggling to answer. And, and that is, is it ever acceptable for a hospital to close? Will we allow creative destruction in healthcare, or is there a moral imperative to avoid any market forces on hospitals in healthcare? You know, the answer to these questions are really important. They will shape how we move forward. Government bailouts to keep capital intensive hospitals operating while the building equipment and conditions deteriorate beyond what is recognizable. Is that the best solution? Keep a building there so we feel good, even though we know that better care is available just one mile or so in either direction. I'm not sure that we identified the right villain in this story. The bankruptcy happened before Tenet even moved in. Turnarounds are hard turnarounds in Red Ocean territory with lots of competitors and little Room for growth is even harder. Few of the elements that lead to a successful hospital operation were President Hahnemann. No matter how hard and the well-intentioned people that worked there wanted it, they could have been given the reigns completely, and perhaps it would've lasted a little longer, but I can't imagine the fate would've been any different. So is it the system, should the government step in and make it lucrative to stand up hospitals in North Philly? Should we adjust Medicare and Medicaid rates based on location, or should they be tied to outcomes? If they're tied to outcomes? And a, a new entrant comes in and figures out how to deliver better outcomes at a lower cost. Taking even more money away from the capital intensive hospital, should we stop those new entrants because they are a risk to those hospitals? You know, my primary question, which is not answered by this article, is, will we allow healthcare to change based on market forces, or is the human cost too high and we're going to lock in place The healthcare we have today forever with policy and payments. I wanna be real clear, the people depicted in this story provided bad leadership. They were dealt a bad hand for sure, but really bad leadership. I don't think anyone set out to make Hahnemann into luxury condos, but to secure any kind of future. That is the deal they made for capital. They raced for pink slips and they lost. Will this happen again? Absolutely. Hospitals sit on some of the most expensive real estate in the country, especially in urban locations. There will be others with bad balance sheets and a bad business model and poor leadership that strike the same deal. That kind of deal is a last ditch effort. The supplier of capital will be painted as villain, but are they really, or was it the system and leadership that created the environment that required the deal to be made? There's really too many questions to answer in this show. I'll let you think about it and comment on LinkedIn. Go ahead out there, comment on the the story. I'll put it out here in a couple minutes and I will see you out there. That's all for today. If you know of someone that might benefit from our channel, please forward them a note. They can subscribe on our website this week, health.com, or wherever you listen to Podcast Apple, Google Overcast, Spotify, Stitcher. You get the picture. We are everywhere. We wanna thank our channel sponsors who are investing in our mission to develop the next generation of health leaders, VMware Hillrom, Starbridge Advisors, McAfee and Aruba Networks. Thanks for listening. That's all for now.