By: Cinda Becker

Opting for an increasingly common way to break free from a mountain of debt, the largest hospital in Syracuse, N.Y., last week declared bankruptcy.
Crouse Hospital is seeking breathing room from nearly $91 million in debt while it reorganizes under Chapter 11 in U.S. Bankruptcy Court in Utica, N.Y. The announcement was made by officials at the Health Alliance of Central New York, the 2-year-old parent of 455-bed Crouse and 259-bed Community-General Hospital of Greater Syracuse. But only Crouse is seeking protection.

Hospital officials insist that current patient care and staff levels will continue at Crouse as it reorganizes and that Community will not follow the lead of its sister hospital.

``Obviously, it's not a happy day. It is what it is: an action that we felt proper and the most prudent one for us to take and move forward from this day on,'' said Bob Allen, a Crouse and Health Alliance spokesman.

The largest hospital in Central New York, Crouse is also one of the largest single hospitals in the U.S. to choose the bankruptcy path in recent years-an action that is sometimes a strategy for unloading debt prior to a sale or merger (Feb. 19, p. 4; Jan. 12, 1998, p. 22).

For Crouse, bankruptcy represents a strategy to bolster the bottom line, officials said. They have no interest in selling, merging or closing either Crouse or Community and are committed to the two acute-care hospitals.

``Chapter 11 is a strategy to continue to service the community,'' Allen said. ``It's not a closure strategy.''

``One way that (hospitals) have found to clear out the underbrush prior to further consolidation or reorganization is the bankruptcy route,'' said Charles Moerdler, chairman of the healthcare practice and a partner at Stroock & Stroock & Lavan, New York. ``Bankruptcy has become as much a tool for restructuring and reorganization as it has been simply a vehicle to clean up and consolidate debt.''

Crouse officials, who vow the experience will only make the hospital stronger, offered a litany of problems that led to this point. For one, the clumsy conversion to a new billing system instituted in 1999 to prepare for anticipated problems associated with Y2K resulted in receivables and bad debt piling up. They also blamed reductions in Medicare payments and a workforce shortage that made it necessary to pay more overtime and hire more expensive, temporary nurses.

Also, officials said, the hospital cast a wide ``safety net'' of services that were money-losers, such as high-risk maternity care and chemical dependency treatment. The hospital has done all this while carrying a sizable load of debt dating back to the 1980s and early 1990s.

In total, Crouse posted a loss of $6 million on revenue of $195 million in 1999, officials said. The shortfall is expected to more than double to $15 million for 2000 when its audited financials are completed in April.

Crouse and Community compete against three other hospitals in Syracuse: 431-bed St. Joseph's Hospital Health Center, 356-bed University Hospital-SUNY Health Science Center at Syracuse and 175-bed Veterans Affairs Medical Center. But there seems to be plenty of business for everyone, said Jeannie Cross, a spokeswoman for the Rensselaer-based Healthcare Association of New York State. The emergency rooms are so busy, she said, the Syracuse VA hospital recently expanded to a 24-hour operation.

``Patient volume is up, but (hospitals) are losing money on every patient,'' Cross said.

Crouse and Community joined under a common parent in February 1999, but they kept their assets and liabilities separate. Although shielded from the bankruptcy, Community has had its own financial problems but is able to meet its obligations, officials said. The hospital lost $1.1 million on $82.6 million in revenue in 1999, according to Bruce Gordon, senior vice president of public finance at Moody's Investors Service. Lenders likely will be the biggest losers as a result of Crouse's bankruptcy.

Thanks to several letters of credit from bankers, only $13.8 million of about $90 million in long-term debt is unsecured, said Scott James, vice president of Cain Brothers, a New York-based investment banking firm. Cain Brothers has been working with the hospital to refinance $35 million in taxable debt, James said. But negotiating the terms of new letters of credit with the banks became insurmountable as cash flow trickled last October to just $4 million-about eight days' worth of expenses.

Meanwhile, the credit-rating agencies are not so sure that Community won't eventually get dragged into the mess. Standard & Poor's placed Community's junk-grade BB rating on CreditWatch negative in the wake of the announcement.

Concerned that Crouse might tap into Community's cash to support itself, Moody's downgraded Community to a speculative grade Ba1 from Baa3 and placed it on its watch list for further possible downgrade. On the advice of its legal counsel, Community has not released interim financials for 2000, which makes it difficult to assess the situation, Moody's said.

Modern Healthcare

-- Anonymous, February 27, 2001