Are North Memorial Health Care’s days numbered?

To say that North Memorial Health Care would rather forget 2010 might be a bit of an understatement.

In the past year, the hospital group based in Robbinsdale has endured a nasty labor dispute and one day strike by its nurses union, fired its CEO after he was arrested for prostitution and seen its bonds downgraded by a top credit rating firm.

Last week, Moody’s Investors Service lowered its rating on $53.8 million in long term bonds issued by North Memorial in 2005 to Baa1 from A3. While not catastrophic (Baa1 is still credit worthy), the move reflects North Memorial’s precarious financial position.

The group will end fiscal 2010 with its third consecutive operating loss. For nine months, North Memorial recorded a negative operating profit margin of 4.3 percent, while operating cash flow dropped 52 percent from the same period a year ago.

The one-day nurses strike in June cost North Memorial about $2 million in expenses and lost revenue. The group also is coming dangerously close to violating the terms of its credit agreement with Wells Fargo.

Even more disturbing, North Memorial’s facilities are seeing fewer patients. For nine months this year, patient volumes fell 10 percent on a same-facility basis, worse than the 7.3 percent decline in 2009.

I think it’s fair to assume North Memorial is a leading local candidate to either be acquired or go out of business. Across the country, experts predict a new wave of hospital consolidations and mergers driven by a weak economy, fierce competition and financial pressures of healthcare reform and lower Medicare dollars.

“Given multiple factors — economic struggles, soft demand, declining reimbursement and healthcare reform — the environment is ripe for more hospital M&A activity,” said Chris Myers, director of the healthcare practice at Chicaga-based consulting firm Navigant. “More hospitals are looking to join larger systems in an effort to gain access to capital, scale economies and specialized expertise, as well as to help respond to reform.

“The new mandate driving the next heat wave of hospital consolidation is sheer survival,” Myers said. “In the new economy, the case for hospital consolidation has shifted from the revenue side of the equation to improved efficiency and reduction of expenses. Health systems that historically relied heavily on investment income to bolster operating income are now forced to confront the stark reality of expenses accelerating faster than revenue.”

Navigant estimates that of the hospitals in the country’s 87 largest metropolitan areas, including Minneapolis-St. Paul, nearly 60 percent are either moderately concentrated or unconcentrated, meaning those markets are ripe for consolidation.

With its flagship 426-bed hospital in Robbinsdale and a dozen clinics, North Memorial is the Twin Cities’ smallest hospital group. Its competition? Three major hospital chains, each with four times more revenue and stellar credit ratings, including Allina Hospitals & Clinics, University of Minnesota/Fairview, and Children’s Hospitals & Clinics of Minnesota.

North Memorial would be an attractive buy. The group enjoys a strong reputations in Level 1 trauma care, open heart surgery and Level III neonatal care. Its new 90-bed hospital in Maple Grove has been a success.

In a rare case of sound financial stewardship, the Maple Grove hospital was completed on time and under budget, resulting in $17.4 million in excess capital funds. Thanks to Maple Grove, North Memorial reported a less severe decline in patient volumes this year. In fact, if you factor in last December’s opening, patient volumes through September actually rose 9.7 percent.

“We view the Maple Grove strategy as essential to the long-term success of NMHC,” Sarah Vennekotter, a Moody analyst, wrote in a recent research report.

However, Maple Grove’s success is a double-edged sword. The hospital apparently is siphoning patients from North Memorial’s flagship facility in Robbinsdale.

Through nine months, same-facility admissions at Robbinsdale declined 10 percent from the same period a year ago. Emergency room visits fell 7.5 percent, surgical volumes fell 12.2 percent and newborn admissions were nearly cut in half.

“Management reports that much of this volume has shifted to the Maple Grove hospital,” Vennekotter wrote. “We feel that it will be increasingly important for NMHC to stem the outflow of its volumes declines at its main campus in order to improve financial viability.”

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