Screenshot from KentuckyOne Health website

Not so long ago, Jewish Hospital was a profitable and revered institution —but a remarkable reversal of fortune took place after it joined forces with the University of Louisville in 2013.

From 2002 and 2011, Jewish Hospital and its partner, Sts. Mary & Elizabeth Hospital, generated an average annual profit of $16 million, including a gain of $41 million in 2011, IRS records show.

In the five subsequent years, under the joint operating agreement with UofL and the rollout of Obamacare, Jewish and St. Mary lost $135 million.

Meanwhile, University Medical Center — the university’s hospital, the James Graham Brown Cancer Center and the Center for Women and Infants — went from a combined net loss of nearly $1 million for 2011 and 2012 to an annual average profit of $40 million since.

A detailed analysis by Insider of a decade worth of IRS filings from Jewish Hospital, KentuckyOne Health and University Medical Center provides additional insights into Jewish Hospital’s recent financial difficulties and why its owner, KentuckyOne, appears to be struggling to sell it.

The data and interviews with university officials also help explain why the university is making moves to shore up the fiscal health of its hospital.

University Medical Center faces challenges, primarily related to ballooning bad debts, an expected significant decline in revenue and rising expenses related to administrative costs and the loss of purchasing power as it separates from the Jewish Hospital owner KentuckyOne.

Dr. Peter Hasselbacher

“The agreement didn’t work out to anybody’s satisfaction,” said Dr. Peter Hasselbacher, emeritus professor of medicine at UofL and an observer of the local health care industry through the Kentucky Health Policy Institute.

The university and KentuckyOne ended their joint operating agreement last summer.

While the fiscal troubles of Jewish Hospital have been the subject of much media coverage, including at Insider, University Medical Center’s bad debts, as a percentage of revenue, have remained under the radar. The bad debts were three times as high in 2016 than they were at Jewish Hospital — though, the university’s hospital operated at a healthy profit, while Jewish Hospital posted a net loss.

IRS records for the period since the split of the university and KentuckyOne are not yet available. However, reports from KentuckyOne’s parent, Denver-based Catholic Health Initiatives, indicate that financial struggles at Jewish Hospital continue.

As Insider has reported, KentuckyOne has been trying to sell Jewish Hospital and other Louisville assets since May 2017, citing significant challenges in the health care industry. Since December of that year, the health system had been in exclusive negotiations with New York-based alternative asset management firm BlueMountain Capital, though sources have told Insider that the deal is in trouble and that some affected parties were preparing for Jewish Hospital’s closure.

A new twist in the deal emerged during the holidays, when Insider learned that the university had submitted a non-binding letter of intent to acquire, with the help of a partner, Catholic Health Initiative’s Louisville-based assets. The university has declined to provide details of the plan, and both KentuckyOne and BlueMountain have refused to answer whether their negotiations remain exclusive.

The university’s interest in acquiring Jewish Hospital, coupled with UofL President Neeli Bendapudi’s recent unsuccessful trip to Frankfort to request help from state officials, indicates that the worries about health care industry pressures that prompted university officials to begin their partnership with KentuckyOne in the first place have remained — or even intensified.

Financial difficulties prompt merger attempt

In 2010, the university, Jewish Hospital, St. Mary’s HealthCare and St. Joseph Health System in Lexington, part of Catholic Health Initiatives, pursued a merger because they were struggling financially and worried about even greater difficulties under the Affordable Care Act.

Steve Beshear, who was governor, rejected the merger in late 2011 because he argued it would have meant a loss of control over a state asset and because he and others feared the university facilities would have to abide by the religious and ethical directives of the Roman Catholic Church. (UofL had agreed, for example, to not perform sterilizations if the merger were accepted.)

Jewish, St. Mary’s and St. Joseph merged without the university to form KentuckyOne, and university leaders continued their search for a partner. According to Modern Healthcare, university officials said in 2012 that their hospital was “unable to generate adequate capital from operations and is not a favorable lending risk.”

In late 2012, the university and KentuckyOne announced their plans for a joint operating agreement, similar to a merger, which transferred all operations — except the Center for Women and Infants — under the management of KentuckyOne.

In return, KentuckyOne was to invest about $1.4 billion over 20 years into the university’s health operations. The agreement called for KentuckyOne to inject nearly $550 million into University Medical Center in the first five years, including $75 million annually for academic and program investments, $95 million in three years for key service lines and departments, $70 million for critically needed IT infrastructure, $3 million annually for research, and $7.5 million per year in capital investments for technology.

Ken Marshall

UofL Hospital CEO Ken Marshall told Insider in a recent interview that university leaders sought to partner with a health system because at the time they estimated that they would need about $20 million a year for routine capital projects, such as replacing aging equipment and renovating areas that were falling apart.

“And we weren’t able to sustain that over a long period,” Marshall said.

In addition, health care experts across the country at the time worried about how the ACA would affect teaching hospitals, such as the UofL Hospital and the School of Medicine.

“At that point, I don’t know if anybody in the country knew,” Marshall said.

The ACA also required people who did not qualify for the Medicaid expansion to buy private health insurance, and many people who complied with the so-called individual mandate chose the least expensive health plans, which came with high deductibles. Even then, many of the newly insured could not afford the health insurance premiums and received federal assistance to make their payments.

University Medical Center CFO John Yaeger told Insider recently that university officials at the time feared that those newly covered Kentuckians would not be able to pay their high deductibles if they incurred medical costs, which would have meant that the university’s hospital would provide significantly more medical care for new patients but would not have gotten paid for it.

In addition, university leaders worried that, in the long term, the Medicaid expansion might negatively affect the state’s finances. The expansion allowed 500,000 additional Kentuckians to gain Medicaid insurance. The federal government picked up the tab for the expansion through 2016 but is gradually decreasing its contribution until states, from 2020 forward, pay 10 percent of the expansion cost.

Hospitals usually receive less money from the federal government for Medicaid and Medicare services than it costs to provide them.

Christopher Graff, University Medical Center vice president of finance, said that before the ACA, about a quarter of patients at the hospital lacked insurance, which meant, most likely, they would have ended up being classified as charity care. However, the ACA moved about 80 percent of those patients onto Medicaid/managed care plans, generally with high deductibles, which those patients couldn’t afford. Whenever those patients incurred medical costs and could not pay the deductible, their care would have been classified as a bad debt — rather than as charity care.

According to the Commonwealth Fund, hospitals in states with Medicaid expansions generally benefited from the ACA, as they saw a significant decrease in charity care.

And according to the American Journal of Nursing, the ACA “reduced certain Medicare and Medicaid benefits to hospitals, (raising the) concern that the law would have a negative impact on urban hospitals that care for large numbers of low-income, uninsured patients. However, some safety net hospitals have seen a faster-than-expected decrease in the number of uninsured patients, which has resulted in an increase in revenue.”

Marshall said that “the (expected) worst-case scenario didn’t happen,” but university officials had to prepare for significant disruption because the law’s impact was uncertain.

The finances at the university’s medical facilities improved markedly during this time. Revenue, at $450 million in 2011, rose to $615 million in 2016, an annual average increase of 9.3 percent. About 95 percent of the revenue came from medical services the hospital provided.

Expenses rose, too, during that period, an annual average 6.4 percent, but not as much as revenue.

Marshall said the joint operating agreement with KentuckyOne also eliminated or reduced by millions of dollars the University Medical Center’s expenses related to support functions. For example, the university eliminated some management positions when KentuckyOne began operating the university’s hospital and cancer center.

“There are expenses you have as a standalone that you don’t have as a system,” Marshall said.

Catholic Health Initiatives, as a national system, also negotiated for lower-priced contracts for software, maintenance and other items, which also benefited the university’s medical operations — though that didn’t help with everything. Expenses for medical supplies rose an annual average of 7.5 percent between 2012 and 2016 when they reached nearly $120 million. As a share of total expenses, the cost of medical supplies remained about the same, at 20 percent.

KentuckyOne would not make anyone available for an interview to talk about the system’s rationale for its union with the university’s medical facilities. In an emailed statement, KentuckyOne spokesman David McArthur said the system entered the agreement with the university “with a vision to create an integrated, comprehensive health system to improve health care outcomes across Kentucky.”

Hasselbacher, the local industry observer, said that Jewish Hospital officials worried about the facility’s demise, as lots of Jewish hospitals across the country had closed or been bought by other health care providers.

“Jewish Hospital was worried more about its financial viability than was University Hospital,” he said. “For the university, money and partners for its academic programs and its commercial research enterprise were, in my opinion, the driving factor.”

Dr. Edward C. Halperin, former dean of the UofL School of Medicine and now CEO of New York Medical College, wrote in 2012 for Academic Magazine that Jewish hospitals were disappearing across America because of marketplace pressures; a decline in anti-Semitism that gave Jews access to medical schools, internships, residencies; and the shrinking Jewish population. But he put a positive spin on the developments: Jewish hospitals “are institutions that succeeded so profoundly in abetting the success of the American Jewish community that they became unnecessary.”

Halperin declined to be interviewed for this story.

While IRS records show that Jewish Hospital in Louisville had been solidly profitable in the years before the joint operating agreement, Hasselbacher asserted that the facility was nearing bankruptcy, carrying hundreds of millions in long-term debt.

Medical facilities of both the university and KentuckyOne also dealt with other challenging industry dynamics: Reimbursement pressures and slow revenue growth already had been pushing health care providers to cooperate more closely, according to a 2013 presentation from the health care lawyer Jan E. Murray, then with a law firm and now with Saint Luke’s Health System in Kansas City.

For example, UofL proposed its merger around the same time that UK HealthCare and Norton Healthcare announced their intent to form an alliance to bolster teaching and clinical programs.

In addition, Murray said, the recession that began in 2008 also limited access to capital, especially for nonprofit providers, at a time that they faced increased demands for IT infrastructure spending.

“Moody’s (in 2012) rated hospital outlook as negative for at least next several years,” according to Murray.

UofL hospital turns profitable; Jewish suffers losses

Internal Revenue Service documents show that the financial performance of Jewish Hospital and University Medical Center moved in opposite directions after the facilities’ joint operating agreement. (Data for some years in the transition was excluded. UMC data for 2017 was not yet available.) | Graphic by Boris Ladwig

For the university’s health facilities, the agreement with KentuckyOne proved beneficial.

Jim Taylor, who as chief executive of University Medical Center at the time, said in 2015 that KentuckyOne had paid the UofL Health Science Center more than $239 million — more than half of the $543.5 million it had pledged for the first five years. In addition, KentuckyOne had invested $51 million in IT upgrades at the university and its medical facilities, partly to meet ACA mandates.

In the three years before the deal, University Medical Center had generated an average annual net income of $4 million. In the three years after the agreement, net income soared to an average annual $40 million.

For Jewish Hospital, the financial curve bent in the opposite direction: In the two years before the deal, the facility generated an average annual net income of nearly $39 million. In the five years after the joint operating agreement, it suffered an average annual loss of $27 million.

In the year ended June 30, 2016, revenue was nearly $60 million lower than in the calendar year 2011, while expenses were nearly $17 million higher — even though the facilities had cut the number of employees by more than 1,500, down to 6,722.  Jewish Hospital and the university’s medical facilities operated on a calendar year basis but switched to a fiscal year ended June 30 when they joined Catholic Health Initiatives.

It’s unclear exactly why profitability at UofL Hospital improved markedly while it declined drastically at Jewish Hospital.

In its worst year under the joint operating agreement, fiscal year 2014, Jewish Hospital reported a net loss of $53.2 million. Compared with the calendar year 2010, revenue had fallen by $69 million to $870 million. Meanwhile, expenses, at $923 million, had spiked by $20 million. Jewish’s sister hospital in Lexington, St. Joseph Health System, reported a similar trajectory.

And while each facility cut more than 500 jobs for fiscal 2015 and each cut expenses by nearly $50 million, revenue at St. Joseph improved slightly — but at Jewish Hospital fell another $33 million.

St. Joseph recorded a loss only in 2014 and produced an annual average net income of $18 million in the three subsequent years. Jewish lost $36 million in 2015 and $35 million in 2016 before revenue spiked by $91.6 million, or nearly 11 percent, in 2017. Expenses rose, too, though not as much, allowing the facility to narrow its loss to $2.3 million in 2017.

Expenses at Jewish and the university’s medical facilities rose in part because of increases in bad debts. University and KentuckyOne officials said bad debts rose partly because the facilities adopted different accounting methodologies when they were folded into Catholic Health Initiatives. However, bad debts swung wildly and, at least for University Medical Center, continued to rise long after the joint operating agreement had begun.

Source: IRS data | Graphic by Boris Ladwig

At Jewish Hospital, bad debts rose from an average $44 million, or 4.8 percent of revenue, before the joint operating agreement to as high as $117 million, or 13.4 percent of revenue, in 2014 — though in two of the three subsequent years, it was near 4 percent.

At University Medical Center, however, bad debts were near $5 million, or 1.2 percent of revenue before the joint operating agreement, but spiked to $24 million in 2014, $40.5 million in 2015 and $64.2 million, or 10.4 percent of revenue, in 2016.

McArthur said the parties accomplished much during the joint operating agreement, but “our integration was challenged by a rapidly changing health care environment … (and) we were unable to achieve full alignment of physician practices and service lines, which made it increasingly difficult to continue the (joint operating agreement).”

In late 2016, the university and KentuckyOne said that they would end their union in summer 2017. First, they failed to merge in 2011, and then their quasi-merger from 2012 had failed four years later.

Jewish Hospital is continuing to lose money — about $1.5 million per week, according to the most recent reports from KentuckyOne’s parent.

McArthur answered a few of Insider’s many questions but said he could not comment on some of the IRS reports as they predate the creation of KentuckyOne Health. He also said he could not make anyone at KentuckyOne available for an interview as the organization’s financial teams “are currently focused on the due diligence phase of divestiture.”

Insider asked to speak with other KentuckyOne executives — including CEO Chuck Neumann, KentuckyOne Medical Group President Charlie Powell, market CEO Bruce Tassin and Chief Medical Officer Ron Waldridge II — but was rebuffed.

Insider also reached out to half a dozen KentuckyOne board members but received no direct responses.

Insider requested interviews with former KentuckyOne CEO Ruth Williams-Brinkley, now an executive with Kaiser Permanente; and Ronald Farr, former principal officer at Jewish Hospital and now with Wisconsin-based ProHealth Care. Both declined to be interviewed. Insider’s request to interview officials from Catholic Health Initiatives also was denied.

Pressures remain

The university has not filed updated IRS reports for University Medical Center for the period after the end of the joint operating agreement, which means it’s unclear whether the facilities continue to generate a profit without assistance and investments from KentuckyOne.

University officials said they planned in a few months to file IRS reports for both 2017 and 2018. They would not say whether they expect the university’s medical center to continue to generate a profit as it did under the joint operating agreement.

Marshall said that a lot of the forces that pushed the parties together — concerns about government reimbursement rates, continuing capital investments, economies of scale — have remained.

“A lot of those things are still in place,” he said.

Health systems across the country still feel consolidation pressures as they try to lower costs, Marshall said.

And while he emphasized that he is not participating in the discussions around a potential acquisition by the university, he said KentuckyOne’s desire to leave the market presents the university with a “unique opportunity.”

Hasselbacher told Insider via email that dealing with changes has always been part of the job of health care leaders — and that is unlikely to change.

“The operational and political dynamics of seven years ago still exist and will continue to exist in ever-changing combinations along with new ones just on the horizon and unimaginable ones yet to come,” he said.

Fluctuating employee, salary figures

Some of the data in the IRS records are difficult to decipher: The documents show, for example, that the number of employees at University Medical Center declined from 3,315 at the end of 2012 to less than 300 during the years of the joint operating agreement. However, while the number of employees fell by more than 90 percent, salaries declined by only 11 percent.

University officials said that during the joint operating agreement, all University Medical Center employees — except those working at the Center for Women and Infants — became Catholic Health Initiatives employees, but the university continued to pay their salaries.

However, the records don’t show any corresponding increase in employment at KentuckyOne or Catholic Health Initiatives.

Employment rose by less than 200 at KentuckyOne Health Medical Group, the system’s physician group, and by less than 900 at Catholic Health Initiatives in Colorado. Meanwhile, KentuckyOne Health Inc. lists no employees for the years between 2012 and 2014 — though it does list salaries of $715,058 for 2012 and of $1.4 million for 2013

In 2015, KentuckyOne lists 2,656 employees for 2015 but no salaries. And two years later, it lists 2,731 employees and salaries of $62 million.