(Bloomberg) — There are two groups Community Health Systems Inc. can't push too far: the doctors at its hospitals, and the debtholders it owes billions of dollars. Right now, the creditors are winning, and the doctors aren't happy.
In Fort Wayne, Indiana, the rancor about Community's neglect of a local health system has gotten so bad that a group of doctors tried to get rid of corporate ownership and buy the company out. And 1,500 miles away on the island of Key West, Florida, doctors say patients are being overcharged so that Community, sometimes called CHS, can rake in cash.
The two locations are among Community's most lucrative, and their conflicts are part of the flip side of an industrywide acquisition binge over the last decade. For-profit hospital chains like Community borrowed billions to snap up rivals, facing massive debt reimbursements just as the benefits of the Affordable Care Act began to wane.
"I understand that they have billions in debt and may need to take money from this chain to service it," said William Pond, an anesthesiologist at one of the Fort Wayne hospitals and president of the county health department's executive board. "But it's very disappointing to see the course that CHS is taking and the devastating effect they're having on our community."
Once the biggest U.S. for-profit hospital chain, Community is selling off other, poorly performing facilities to pay off $2 billion of its $15 billion in debt. Yet even as the company skimps on spending and patient satisfaction lags at key facilities like Fort Wayne, its bonds are rising in value — an indication that debtholders are betting that the chain will make a financial turnaround.
The company's $3 billion of 6.875% bonds due February 2022 have gained almost 30% this year and were changing hands at 89 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt still trades at yields about 8 percentage points more than government debt.
If the chain can't subdue the unrest at its most profitable locations, it's not clear how successful the turnaround will be. Indiana and Key West represent just nine of Community's about 150 hospitals, yet they contribute an estimated 16% of the company's adjusted earnings before interest, taxes, depreciation and amortization, according to Mizuho Securities analyst Sheryl Skolnick.
'Dirty, Dingy Hospital'
Quality has been suffering at the flagship Lutheran Hospital in Fort Wayne, which has about 400 beds. Patients rate their overall experience at two stars, compared with four stars at the crosstown hospital owned by nonprofit Parkview Health, according to the Centers for Medicare and Medicaid Services' Medicare.gov website.
"The doctors are great but it's a dirty, dingy hospital," said Chuck Surack, founder of Sweetwater Sound Inc., a music retailer in Fort Wayne, who is considering taking his 1,500 employees to the cross-town rival if quality doesn't improve. Community "doesn't invest in the facilities."
Community is working to support Lutheran "with the facilities and resources they need," said company spokeswoman Tomi Galin. The Franklin, Tennessee-based chain has spent $400 million on upgrades since buying Lutheran in 2007, including construction of a free-standing emergency room and robotic surgery systems, and has given raises to most employees, she said in an email.
'Going to Fester'
Complaints about Key West, where patients have no other choice than the Community-run hospital short of traveling 50 miles or to the mainland, came to a head last year when politicians tried to cancel the company's 30-year lease on the facility. They backed off after Community replaced the hospital's chief executive and other managers, although a local group continues to collect stories from unhappy patients.
Quality measures and patient satisfaction are improving at the facility, called Lower Keys Medical Center, and Community is investing $20 million in infrastructure, according to Galin, the spokeswoman. Still, doctors said patients are overcharged, according to Richard Payne, a city commissioner. Lower Keys had an average revenue of $13,348 per patient last year, compared with a median of $8,269 at Community's 21 Florida hospitals, according to Morrow, the Franklin Trust analyst.
"This is going to fester and get worse and worse," Payne said. "People who live in the Keys go out of town for treatment. Some people have moved so they can get good treatment at a reasonable price."
Caught Off-Guard
The anger at Fort Wayne's Lutheran Health Network, however, caught the company unaware.
"Frankly, we were surprised by some of these concerns," Community Chief Executive Officer Wayne Smith and Chief Operating Officer Tim Hingtgen said in a May 22 letter to Lutheran employees. "We believed things were going well, based on reports we received from your market and division leadership."
