MedStar Health, which is losing tens of millions of dollars a year, is paying tens of millions of dollars for Georgetown University Hospital, which is also losing tens of millions of dollars a year.
It was, said John McDaniel, chief executive officer of MedStar, too good a deal to pass up.
How is it a good deal to take over operation of a hospital which is seeing big annual losses and a steady decline in patients?
If MedStar can get Georgetown's financial performance turned around, it can assume a dominant position in the Washington market. And that, McDaniel said, will help at the Baltimore end of the parkway as well.
Others see potential problems in adding Georgetown's red ink to MedStar's.
"In the short term, this is going to hurt them more than it's going to help them," warned John Wells, an analyst for the bond-rating agency Fitch ICBA. Fitch downgraded MedStar's bond rating in May over concerns about the Georgetown deal, as well as MedStar's losses generally.
Even McDaniel concedes that the timing is less than ideal.
"We would have loved to see Georgetown come online a year and a half from now," when MedStar has the rest of its system running in the black, McDaniel said.
However, he added, "Opportunities don't always present themselves at a propitious time." MedStar, he said, is determined to be "fast, flexible and focused," although, he admitted with a smile, those goals can be contradictory.
Counting Georgetown, which it took over last month, MedStar now operates seven hospitals in the Baltimore-Washington area, along with nursing homes, a home health agency, physician practices and assisted living facilities. The addition gives MedStar 2,900 beds, annual revenue of $1.85 billion and 22,100 employees.
MedStar, the largest health system in the Baltimore-Washington area even before Georgetown, was created by the 1998 merger of Baltimore-based Helix Health and Washington-centered Medlantic Health.
The basic strategy is that, with regional HMOs and regional employers, there is a regional health market.
"This is a Baltimore-Washington market play," McDaniel said.
The Georgetown deal caps a hectic period for MedStar.
In fairly short order, the new system set up headquarters in Columbia; shut the venerable, but money-losing, Church Hospital in Baltimore; reorganized its doctor practices by getting out of unprofitable Medicare contracts and releasing about a third of its doctors to independent practice; and sold nursing homes in the Washington area.
"Following the merger, we spent the first couple of years restructuring the company, divesting a number of assets that did not add value, programmatic or financial," McDaniel said. "The first 24 months has been to get the ship in shape to sail out of the harbor. Going forward, I'm optimistic."
In the process, it booked large losses - an operating loss of $118.2 million in fiscal 1999 and an expected $90 million or so when the books are closed on the fiscal year that ended June 30, 2000.
Much of the operating losses were offset by investment income, leaving the balance sheet undamaged, according to Michael P. O'Boyle, MedStar's senior vice president and chief financial officer. "We have not eaten into our investment assets to fund our operations," he said.
One-time charges related to the closing of Church and the reorganization of the physician practices accounted for the lion's share of the operating losses. Some were actual cash payouts, such as severance pay, while the bulk came in noncash items such as writedowns of assets.
"We treated fiscal '00 as the let's-get-stable year; let's-cut-the-bleeding," O'Boyle said. "In '01 and '02, we'll get back to breaking even from operations."
While the Georgetown deal is certainly a key to MedStar's future, it's not ignoring the Baltimore end of the market.
"We have work to do there," McDaniel conceded. "Number one, our institutions are not textbook in terms of where they're located. There are holes in the market."
In the past, filling holes has meant mergers or acquisitions, but now, McDaniel said, the hectic pace of hospital mergers has slowed.
"It's like a pendulum. It became the fad," McDaniel said. "Like dot-com stocks, everybody got caught up in the hype of it. Now, institutions are being more selective."
He sees MedStar filling the "holes" in the Baltimore market through collaborative arrangements: "the institutions don't have to turn the keys over."
He'll also consider merger or acquisition opportunities that come along.
"There's nothing cooking on the front or back burner," he said. "But if something comes on the market tomorrow, we're going to jump on it."
In addition to the Georgetown deal, MedStar did make a proposal recently to North Arundel Health System, although North Arundel ultimately chose to affiliate with the University of Maryland Medical System.
McDaniel said he doesn't envision closing any more hospitals, the way MedStar shut down Church.
