Sebastopol's Sonoma West Medical Center bets future on outside management

Turning a struggling hospital around is tough, but not impossible.

In an effort to do just that, after almost nine months of increasing debt, Sonoma West Medical Center engaged Pipeline Health on July 8 as an independent contractor to manage hospital operations in an effort to resolve its on-going financial troubles.

By bringing Pipeline on board, one immediate affects will be to eliminate the Sebastopol hospital’s need for expensive, outside consultants currently under contract. Under terms of the agreement, SWMC will pay Pipeline $125,000 a month for the first six months, and $150,000 a month for the second six months, with a 5 percent yearly increase after that. According to hospital officials, during the initial due diligence Pipeline estimated they could save the hospital approximately $25,000 a month on consultant fees, and that number may be even higher.

“We absolutely believe this is the right choice,” said Dan Smith, SWMC board chairman. “It’s not a guarantee the hospital will be successful, but it will give us a lot of room to run.”

In April 2014, the 73-year-old Palm Drive Hospital closed amid two bankruptcies in seven years, and re-opened in October as SWMC. It is a 25-bed capacity hospital with a 24-hour emergency room, new technology, and a bevy of specialized services in endocrinology, urology, and a neurologist specializing in Alzheimer research, the hospital aims to draw patients from beyond the region.

Current monthly operating losses for SWMC are approximately $600,000, for which hospital officials have cited lower-than-expected reimbursements from Medicare, Medi-Cal and private insurers. In June, SWMC defaulted on a $6 million loan, $5.8 million of which was forgiven.

In a 2010 report, Becker’s Hospital Review, a health care trade publication, cited 10 successful hospital turnarounds. Among them was Erie County Medical Center in Buffalo New York, which suffered from a $30 million loss.

The new CEO started the turnaround by changing its image, making some relatively inexpensive cosmetic change making the hospital look clean and inviting, and led the hospital in publicity campaign. Among other strategies it also increased its average daily patient turnover and emergency room visits, and upgrading and facility computers.

Two years later the facility saw a $17 million profit.

On the other hand, sometimes a hospital’s troubles are too deep by the time help is brought in, and even a highly focused strategy isn’t enough, Brecker’s also reported. As a result, hospitals focused on preserving independence look to sales or mergers to keep their facilities open.

In 2012 there was twice the number of hospital mergers as compared to 2009, according to Irvin Levin Associates, a healthcare business publisher. Last year, 18 hospitals closed their doors many of which unsuccessfully sought last-minute sales or partnerships to stay open.

Under the agreement with Pipeline, SWMC will gain an interim CEO and CFO, and also have access to approximately eight to 10 other Pipeline administrative specialists such as revenue cycle, IT, and data analysis directors.

Pipeline is a management company that owns and operates hospitals and healthcare organizations including four in Southern California and Howard University College of Medicine in Washington, D.C. The company also partners with Los Angeles-based SRC Management, providing healthcare advisory services, with regards to financial operations, revenue cycle, supply chain and capital strategy.

Luke Tharasri, Pipeline’s chief operating officer, has stepped in as the hospital’s interim CEO, and Pipeline’s chief financial officer, Robert Heinemeier, has stepped in as interim CFO. As both Tharasri and Heinemeier work for Pipeline, as opposed to being held accountable by a board of directors, they will be held more accountable for financial results, Smith said.

Tharasri pointed out Pipeline has a track record of turning smaller, distressed hospitals around, including Howard. In 2014, Howard was facing bankruptcy, and two years later they are breaking even and on course to make a small profit.

Tharasri said Pipeline has also used their leverage in negotiating cheaper contracts for major insurers such as Blue Shield and Anthem. He also outlined strategies for turning the hospital’s finances around including vendor management, increasing the volume of emergency room patients, and reducing the length of hospital stays.

“Our mission is to take these types of situations and make them successful,” Tharasri said.

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