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Lake Health presses on as finances turn around

Following years of consolidation in Northeast Ohio’s health care market, Lake Health System is one of the few independent systems left standing.

And it intends to stay that way.

Despite a recent rating downgrade and two consecutive years of operating losses, Lake Health officials are optimistic about the future.

“We believe that being independent creates a home for independent physicians and like-minded physicians as well as keeps us supporting the community,” said Rick Cicero, senior vice president of marketing and business development for Lake Health. “Even though we’re a nonprofit, we generate significant tax dollars in this community. Being independent and directing the growth that we do in Lake County helps the county overall.”

In 2015 and 2016, the system reported a $30 million loss, which officials said was a one-time writedown stemming from problems with an IT system conversion. It represents both the added implementation costs and the results of billing delays that affected the system’s ability to collect services. In 2017, Lake Health posted a $4.8 million operating loss, significantly better than the $22.8 million loss the year prior.

“If you look at the ’17 versus ’16, we did have about an $18 million turnaround from an operating income standpoint, so we are definitely, obviously heading in the right direction there,” said Bob Tracz, chief financial officer for Lake Health.

The system is aiming for a 1% operating margin in 2018, which would equate to a $3.5 million to $4 million operating income, Tracz said. To achieve this, Lake is looking at its supply side, health care benefits and revenue cycle improvements, he said.

This month, Moody’s downgraded Lake Health from A3 to Baa1 and revised the outlook from negative to stable. Moody’s said that the system’s margins “will likely improve but remain lower than historical levels given labor cost and payer pressures.” Following the 2017 budget shortfall, these pressures will “challenge the hospital to return to historical margins.”

As Lake Health’s credit strengths, Moody’s cited strong liquidity, a defined contribution pension plan and moderate operating leases and the system’s leading market share.

Despite Cleveland Clinic and University Hospitals dominating the Northeast Ohio health care scene overall, Lake Health still enjoys a 52.9% market share in Lake County as the only hospital provider there. According to Moody’s, the system’s growth and physician alignment strategies “will continue to support a leading market position in a very competitive region.”

Lake Health is also embarking on a new venture with a group of independent physicians constructing a specialty, acute care hospital in Beachwood. Lake has a 51% controlling ownership interest in the project, which is a 69,800-square-foot hospital with 25 patient beds, operating and procedure rooms, emergency room services, diagnostic services and physical therapy.

The move expands Lake Health’s geography and creates another access point for the system, said Cicero.

“As we’re working closely with the payers and with employers, a location for us in Cuyahoga County becomes a critical addition to a network within our clinically integrated network,” he said. “It aligns us with a whole new group of surgeons that historically did not work at Lake Health. And it really becomes that opportunity in that kind of setting to help to continue to develop a high-quality, lower-cost option in the market.”

Moody’s notes that the project, if successful, could generate profitable business for Lake Health, but it may bring startup risks depending on the pace of the ramp-up.

Given costs, competition and changing reimbursement models, maintaining independence can be challenging, which makes it all the more important to collaborate with other players, said Tom Campanella, director of the health care MBA program at Baldwin Wallace University. This new hospital is an example of such collaboration.

“On paper, in theory, it could be successful,” he said. “But like anything else, theory is great, paper is great, but it really is how it’s actually put together. Do they have the right type of physicians? Are they able to meet the needs of the market? Are they able to successfully get their message out to the market, both to employers as well as to consumers and insurance companies that they have something that may be different out there in the marketplace … It’s not like field of dreams if you build it, they will come. You need to be able to know your market and find a way to make sure that, like in any industry, that you have something that is potentially attractive to the marketplace.”

Lake Health also has been seeing “nice growth” in its Perrico Health Campus in Willoughby, which opened last year, and its Mentor Wellness Campus, which opened in January, Cicero said.

The other area of growth Lake has seen has been in its physician recruitment. The system has been adding 15 to 20 physicians a year.

“The bottom line is Lake has a strong reputation, and they do have historically a good relationship with independent physicians,” Campanella said. “And I think they position themselves to — based on that — to be potentially successful in the new marketplace that we’re seeing out there in health care.”

Article source: http://www.crainscleveland.com/article/20180527/news/163096/lake-health-presses-finances-turn-around