Finding new owners to keep Topeka hospital open could be a challenge

The announcement that St. Francis Hospital in Topeka is in danger of closing has become the latest lens through which Kansas politicians are interpreting the state’s failure to expand Medicaid.

Democrats and some Republicans say they plan to put expansion back on the table when the Legislature comes back in May, after failing to override Gov. Sam Brownback’s veto last month.

“If this is happening in Topeka, this could happen to our city, our area,” said Sen. Barbara Bollier, a Mission Hills Republican and retired physician.

Other Republicans, like Rep. Dan Hawkins of Wichita, say their votes against expansion aren’t changing.

“It’s being used as great political folly to further the Medicaid expansion narrative,” Hawkins said. “But in the end, Medicaid expansion is not going to stop the decline of hospitals.”

Brownback said Tuesday that he and officials with the hospital’s parent company, SCL Health, are looking for a way to keep the facility open.

SCL Health CEO Mike Slubowski said the company is willing to donate it if a new owner can be found, but his company is focused on other markets.

“With or without another operator, however, SCL Health will cease operating the hospital this summer,” he said.

That leaves the hospital looking for a buyer. Medicaid expansion is a factor in those discussions, but so are other law changes and Topeka’s market limitations.

Colorado-based SCL Health was formerly called the Sisters of Charity of Leavenworth Health System. It’s the same company that sold Providence Medical Center in Kansas City, Kan., and St. John Hospital in Leavenworth to California-based Prime Healthcare Services in 2013.

According to St. Francis’ latest available tax records, the hospital lost about $1.5 million in 2013, $6.2 million in 2014 and $12.5 million in 2015 and was carrying about $21 million in bad debt at the end of 2015. Slubowski said the financial picture was even worse in 2016.

That gave SCL Health a strong incentive to get the hospital off its books, even though the health system as a whole has a profit margin of almost 12 percent over the last four years. Moody’s Investors Service, a bond rating agency, said last year that SCL’s Aa3 rating depends on it maintaining that profit margin to pay down its “high debt service requirements,” and additional debt could mean a rating downgrade.

So SCL Health has been looking to sell St. Francis for more than a year, but it has been unable to find a buyer.

Holly Carnell, who studies hospital mergers and acquisitions for Chicago-based McGuireWoods, said the lack of Medicaid expansion in Kansas makes it a less attractive target. Expansion would extend Medicaid coverage to an estimated 150,000 Kansans, about half of whom are currently uninsured.

“I think any buyer is going to be looking at whether a target is located in an expansion state, especially if it is a safety-net hospital, because that fact is critical to the prospects of a hospital being long-term sustainable and profitable,” Carnell said.

But Carnell said expansion is more key for rural hospitals like Mercy Hospital in Independence, Kan., which closed last year.

Rex Burgdorfer, vice president of Juniper Advisory, which helps nonprofit health systems with mergers and acquisitions, said a bigger challenge for potential buyers of St. Francis is a strong local competitor, Stormont Vail Health System, which is gobbling up patient share and partnerships with local providers.

Burgdorfer said the Affordable Care Act changed hospital payments to “bundles” for treating conditions rather than fees for specific services. Hospitals also are penalized when patients are re-admitted for complications soon after they’re discharged.

The changes create incentives to improve care, but Burgdorfer said they also spur hospitals to consolidate so they can control costs and follow-up care.

“I think the passage of health care reform really caused nonprofit systems to be of the belief they need to have real heft and scale within a geographical area, so they have a vertically integrated company that has IT, physicians — the full continuum of care all under one roof,” Burgdorfer said. “What that’s meant is that there are very dominant regional systems like Stormont Vail in Topeka.”

Stormont’s market share complicates the path forward at St. Francis.

According to a financial statement SCL Health released in conjunction with a $55 million bond issue last year, St. Francis had about 31 percent of inpatient market share in and around Topeka, and the population there was growing less than 1 percent over five years. The other markets where SCL does business — Denver, western Colorado, central/eastern Montana and western Montana, are growing faster, and SCL has higher market share in all but Denver.

Uncertainty over Medicaid expansion was just one of a host of regulatory challenges outlined in the bond issue statement, which was released May 11, 2016. Another was persistent budget crises in multiple states that “may result in cutbacks to government health care programs.”

The report proved prophetic in Kansas. A week after it was released, Brownback announced he was cutting Medicaid reimbursements 4 percent.

This story was originally published April 18, 2017 at 6:29 PM with the headline "Finding new owners to keep Topeka hospital open could be a challenge."