CHICAGO - Hit with downgrades last year in the wake of poor financial results and bookkeeping discrepancies, Chicago-based Mercy Hospital & Medical Center's situation appears to have deteriorated further over the last year, prompting a warning yesterday from one rating agency that another downgrade may be in store.
The hospital -- currently rated Baa2 by Moody's Investors Service and BBB by Standard & Poor's -- found itself in a familiar situation. In late 1998, Moody's issued a similar warning. Now, it says it is again pondering a downgrade. Analysts followed up the 1998 warning with a downgrade last year, and Standard & Poor's soon followed suit.
The hospital has $75 million of uninsured debt outstanding, sold through the Illinois Health Facilities Authority.
Mercy joins an array of hospitals and health care systems around the country that have been strained financially by changes to federal formulas for Medicare reimbursements and increased pricing pressures caused by the shift to managed care.
The issues last year concerned the lateness of the hospital's audited financial results, its dwindling cash figures, and its admission that a prior administration had incorrectly reported past financial results because it underestimated costs related to malpractice claims and losses associated with unpaid bills.
Based on information currently available to Moody's analysts, the hospital's position has worsened on several fronts. An audit of fiscal year 1999, which ended June 30, is still not available, and the hospital's year-end cash reportedly declined to $28.7 million in 1999 from the 1998 figure of $62 million.
Analysts said the audit is not yet ready "reportedly because the auditors are not totally comfortable with certain accounting treatment utilized by Mercy; similar to last year, we again have concerns with the reliability of Mercy's reported numbers."
"It seems a lot of the factors that reared themselves a year ago are again rearing themselves," said Moody's analyst Beth Wexler.
But the hospital's problems extend beyond its finances. In 1997, longtime chief executive officer Winkle Lee retired. Sources said he had failed to keep pace with the industry's dramatic changes. The Sisters of Mercy of Chicago, the order that owns the hospitals, installed a new financial team, including chief executive officer Charles Van Vorst and chief financial officer Dan Morgan.
The new administrators discovered the reporting errors and moved to update the hospital's reporting methodology. But last September Morgan resigned, and Van Vorst retired in December. Jack Holton, who had managed finances of the hospital's nursing home operations was named acting chief financial officer and is a candidate for the permanent position.
The hospital also promoted chief operating officer Patrick Paulson to CEO. He was hired in 1997 from another local hospital system, according to a Mercy spokeswoman.
"Certainly management turnover doesn't bode well for any hospital system because there's no consistency to enact initiatives to correct problems," Wexler said.
Hospital officials noted that the both Paulson and Holton were part of the new management team hired in 1997.
Holton said he expects to receive the completed audit from Ernst & Young on Friday. Arthur Andersen conducted the 1998 audit, and Holton said he did not know the circumstances related to the change.
Holton confirmed the financial results reported by Moody's and acknowledged that a downgrade "could happen." He added that the hospital is taking several management steps to improve its finances -- such as shifting some of its reliance on Medicaid payments to private insurers -- and expects its results to improve this year.
A Standard & Poor's analyst said the agency will wait for the results of the 1999 audit before it reviews the hospital's credit.
