Hartford Business Journal

14 Hartford Business Journal • January 26, 2015 www.HartfordBusiness.com future. The hospital's balance sheet, he said, remains strong with little debt and strong cash reserves to combat short- term operating loss- es. He's steadfast in his belief Con- necticut Children's will remain a free- standing, indepen- dent hospital, and is implementing a strategic plan to cut costs and diversify its business with an eye toward becom- ing a regional player beyond Connecti- cut's borders. The hospital is also investing in research through partnerships with the UConn Health Center and Jackson Laboratory, which Gavin said will lead to breakthroughs in individualized care for children. That could be a game-changer for improving patient health and putting Connecticut on the national and global map, he said. "This has been a three-year challenge," Gavin said. "I've been through lots of insur- ance, investment, and underwriting cycles. This happens to be a healthcare cycle we are going through, but this isn't going to last forever." Hospital economics 101 All Connecticut hospitals have been pinched financially in recent years, but Con- necticut Children's may be facing the tough- est challenges. The biggest issue is Medicaid, the govern- ment insurance program for low-income indi- viduals and families. Medicaid reimbursement rates are set by the state, while the federal government foots half the bill. Not only has the percent of costs covered by state Medicaid payments shrunk dramatically over the last six years, but Connecticut Children's has seen a steady uptick in Medicaid patients, largely a result of the Great Recession, Gavin said. Connecticut Children's, like other hospi- tals, hasn't seen a Medicaid reimbursement rate increase in years, and now payments from the state only cover about 65 percent of costs, compared to 90 percent in 2008. Hospitals tra- ditionally make up for that shortfall by charging commercial insurers more, a method known as cost shifting, but with 55 percent of its patients now on Medicaid, Connecticut Children's isn't receiving enough money from privately insured patients to make the numbers work, Gavin said. As a result, the hospital lost $63 million from its Medicaid business last year. By comparison, the average adult hospital in Connecticut only has about 15 percent of their patients on Medicaid. "This is not a sustainable model," Gavin said. "This trend line can't continue. I can't cut our expenses to keep up with that. If the state can cover costs at 85 percent or higher, you can cost shift the difference, but beyond that, those losses go straight to the bottom line." Lawmakers say they are aware of the unique pressures Connecticut Children's faces as the only free-standing kid's hospital in the state. It has a legal and moral responsi- bility to accept all patients, regardless of the type of insurance they have, which is why the legislature just approved a special $10 million payment to strengthen the hospital's finances. That money should land Connecticut Chil- dren's in the black this fiscal year, Gavin said. Sen. Beth Bye (D-West Hartford), who co-chairs the Appropriations Committee, said the legislature needs to rethink the way it funds hospitals that see a significant por- tion of Medicaid patients. But a solution won't be easy to find with the state facing billion- dollar deficits over the next few fiscal years. At the same time, Bye said she doesn't want a situation where Connecticut Children's must beg the legislature for more money every year. "We need to try to get our hands around defining hospitals that have a certain size Med- icaid population and think about how we can support them," Bye said. "I don't know what the answer is sitting here today, but we need to look for a fix to fee for service that actually pays for the services provided. I know [Connecticut Chil- dren's] is a critical institution for the Hartford region, and they provide really good care. We have to figure this out." The Human Services Committee is exam- ining the Medicaid funding issue, Bye said. Long-term strategy Despite the financial pressures, Gavin said he's optimistic about the future. The entire healthcare industry has hit a three-to-five year rough patch as it deals with a chang- ing landscape brought on, in part, by federal healthcare reform. Growing and diversifying the business, Gavin said, will be crucial to make up for Med- icaid's funding shortfalls. And he sees Con- necticut Children's evolving into a regional player. It already established a foothold in Massachusetts through partnerships with Baystate and Shriners hospitals in Springfield, and a larger deal in western Massachusetts is in the works. Gavin wouldn't elaborate. Entering New York is also part of the long- term plans. "The consolidation going on in Connecticut is going to happen regionally as well, in par- ticular in the rest of western Massachusetts and we want to be a player there," Gavin said. Jennifer Endicott, Baystate Health's chief strategy officer and senior vice president, said they were attracted to a partnership with Con- necticut Children's because it creates econo- mies of scale for the $2 billion acute-care hospi- tal to offer more advanced and comprehensive pediatric services at a lower cost. Prior to the partnership, many kids in west- ern Massachusetts had to travel 90 miles to Bos- ton to get care. Connecticut Children's is only 25-30 minutes away, and instead of patients and families traveling to receive treatment, doctors will move between Hartford and Springfield. The hospitals are still determining how the partnership will work and which services will be shared, but both institutions will gain access to a larger patient base. They'll also look into co-hiring specialists to share costs. One area they'll collaborate on is neurosurgery, with Connecticut Children's doctors traveling to Baystate Hospital to provide care. "Both organizations can benefit from this," Endicott said. "We have equipment and cer- tain services we can provide and they have the expertise and pediatric care physicians." In Connecticut, Children's Medical Center dominates pediatric care and has even more room for growth as adult hospitals continue to get out of the business, Gavin said. It has 19 loca- tions and has boosted its patient base 50 percent over the last seven years by taking over pedi- atric units at Hartford Hospital, UConn Health Center, and in Waterbury. It is looking to bring higher-end pediatric care to western Connecti- cut. Gavin predicts the hospital can grow its Connecticut market share by 30 percent. Meanwhile, cost-cutting initiatives have lowered the hospital's annual expenses by $18 million without resorting to significant cuts to staffing or services, Gavin said. research ambitions But what Gavin said really excites him is opportunities in research and preventative care. Connecticut Children's has formed part- nerships with UConn Health Center and Jackson Laboratory on several fronts including an ava- tar program that aims to develop individualized treatments for cancer patients with solid tumors. The program focuses on transplanting a child's tumor into genetically engineered mice, and then applying different treatments to determine which is most effective in com- bating cancer. This approach allows multiple drugs to be tested in the mouse avatar first. It also speeds up the time it takes to bring more precise treatments to patients. This kind of groundbreaking research, Gavin said, could distinguish Connecticut Chil- dren's as a worldwide leader in genomic medi- cine and put it on a level with St. Jude Children's Research Hospital, which is widely considered the gold standard in pediatric care. "We have our short-term challenges, but we believe we have put a plan in place to secure our future," Gavin said. "Long-term the opportunities are enormous." n from page 1 CT Children's pushes regional expansion CT Children's still makes long-term investments Despite recent financial issues, Connecticut Children's balance sheet has remained relatively strong, which has allowed the organization to con- tinue to make long-term investments, even though it's dealing with short- term operating deficits, said Marty Gavin, the hospital's CEO. That's partly because Connecticut Children's capital structure relies more heavily on philanthropy than most adult hospitals, and fundraising efforts have remained strong. Just last week, Connecticut Chil- dren's received a $1.5 million grant from United Technologies Corp. to build a new 2,000-square-foot family resource center at its Hartford campus. Last year the hospital raised $12 million. Next year's goal is $14 million; long-term, Gavin said he wants annual contributions to reach $25 million. Connecticut Children's has little debt and $200 million in cash, but Gavin said he worries that continued short-term deficits could eat into the hospital's reserves and hurt its ability to make future investments. Recently, however, Connecticut Children's has added a new $38 million health IT system, opened a $10 million ambulatory care center in Farmington and a new primary care facility in Hart- ford, and recruited more physicians. Connecticut Children's now has 1,100 people on its medical staff, including 170 doctors, a 50 percent increase from seven years ago. But don't expect many more signifi- cant brick-and-mortar investments, Gavin said. While many Connecticut hospitals are rushing to build outpa- tient centers around the state, Con- necticut Children's doesn't want to go down that route. Instead, it would rath- er partner with those hospitals and/or developers to lease space. — Greg Bordonaro By tHe numBers Connecticut Children's Medical Center $20M FY 2014 operating deficit 316,000 Total care visits 55,560 Emergency department visits 19 Total locations 2,200 Employees $12M Donor support s O u R c e : c O n n e c T i c u T c H i l d R e n ' s M e d i c a l c e n T e R Marty Gavin worked 16 years at the Phoenix Cos. in Hartford before retiring in 2000. He came out of retirement in 2006 to become Connecticut Children's CEO. P H O T O | P a b l O R O b l e s

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