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This California banker bet on turning around Philly’s Hahnemann Hospital. He’s running out of time.

Chief executive Joel Freedman thought his experience with safety-net hospitals near Los Angeles and in Washington would help him with a turnaround at Hahnemann. It hasn’t so far.

Hahnemann Hospital at Broad and Vine April 8, 2019. DAVID SWANSON / Staff Photographer
Hahnemann Hospital at Broad and Vine April 8, 2019. DAVID SWANSON / Staff PhotographerRead moreDAVID SWANSON / Staff Photographer

Joel Freedman was optimistic that he could turn around Hahnemann University Hospital.

Never mind the fact that it lost money for 14 straight years under former owner Tenet Healthcare Corp., one of the nation’s largest hospital companies.

When Freedman, a California investment banker, bought Hahnemann — and St. Christopher’s Hospital for Children — early last year for $170 million, he was banking on his experience with so-called safety-net hospitals near Los Angeles and in Washington that typically treat poorer patients on government-provided health insurance.

Freedman, chief executive of American Academic Health System LLC, which bought the two city hospitals from Tenet, knew it wouldn’t be a financial home run but, surely, it could be profitable.

Instead, Hahnemann is on its fourth CEO since Freedman’s entry and facing a financial cliff, losing $3 million to $5 million a month. It faces closure without more money from government and insurers, as well as savings in the academic training program with the Drexel University College of Medicine. More than 200 layoffs this year, including 175 announced last week, are expected to save $18 million a year.

If Hahnemann, founded in 1848, closes, it wouldn’t just affect some of the city’s sickest and most vulnerable patients, it would also scatter hundreds of students who train at the 496-bed hospital — the main academic affiliate of Drexel University’s College of Medicine — and eliminate more than 2,500 jobs from Center City.

Need a solution ASAP

Asked in an interview last week when a solution needed to be in place to save Center City’s Hahnemann, Freedman said: “ASAP or else." But “if Hahnemann has to close,” it won’t be sudden, Freedman said. “We have obligations to patients.”

“We’re not going to let St. Christopher’s go down with Hahnemann,” said Freedman, saying of the 189-bed hospital in the city’s Juniata Park/Feltonville section. “Maybe it should be a nonprofit.” State data show that St. Chris had small losses in its last two years of Tenet ownership, but had been consistently profitable before that.

Freedman, 54, soft-spoken during an hour-long interview last week in Hahnemann’s fifth-floor executive offices, is clearly under intense pressure. Some colleagues, who have been stunned by management churn at the two hospitals, say he has talked about filing for bankruptcy protection in 90 days. Asked about that, Freedman said sometimes what he says depends on how things are going that day.

To Philadelphia health-care experts, the dire financial condition at Hahnemann, which gets most of its revenue from government insurance that doesn’t pay well, is no surprise.

“Operating Hahnemann would be a challenge for any company, let alone one that didn’t have this kind of experience,” said Joshua Nemzoff, whose New Hope company advises nonprofit health systems in mergers and acquisitions.

Learning from the past

For his part, Freedman, an investment banker by trade, said he got really passionate about and gained confidence in serving the underserved when he helped put together a small network of four safety-net hospitals near Los Angeles in the late 2000s. Since getting into the Philadelphia market, he sold out to his partners in that company, he said.

Two of those four hospitals, which have a total of 497 beds and $290 million in revenue in 2017, lost money that year, according to public data.

In October 2014, Freedman’s Paladin Healthcare Capital LLC won a five-year contract to manage Howard University Hospital in Washington, D.C., which had on operating loss of $58.7 million in the year ending that June. Under Paladin, operating results improved to a $19.5 million gain in 2016, but have since dipped to a gain of less than $500,000.

Freedman said the Howard contract will not be renewed because he has to devote all of his attention to Philadelphia, where he moved with his family (who are the beneficiaries of a trust that owns 90 percent of the equity in the Philadelphia venture). They live near Rittenhouse Square, and his son is a sophomore at Friends Select.

“Hahnemann looked a lot like Howard,” Freedman said. Patients stays in the hospital were too long, and documentation of patient conditions was weak, which meant Howard wasn’t getting paid for all the care it was providing.

The same is true at Hahnemann. The difference, Freedman said, is that at other hospitals he has found a physician on staff to champion better documentation of patient conditions. Not so at Hahnemann, he said. Because of inadequate documentation, Hahnemann is leaving more than $3,000 on the table for every discharge, Freedman said.

Freedman also said Hahnemann has been handicapped by contracts with insurers, including those that manage Medicare and Medicaid benefits. Hahnemann is operating under a contract with Independence Health Group that dates to 2016 and runs through Dec. 31.

Hahnemann hasn’t had any rate increases in two years, Freedman said. Independence, the largest insurer in Philadelphia, wouldn’t confirm, saying terms are confidential.

More state money

The hospital is looking to the state for help in the form of supplemental payments, especially because Hahnemann picked up Medicaid patients when North Philadelphia Health System’s St. Joseph’s Hospital closed three years ago. However, more poorer patients didn’t come with more of the state funds that had kept St. Joseph’s afloat for years.

“For us to be viable, we need supplemental payments,” Freedman said.

The $10 million to $15 million in payments the company gets for serving a high number of Medicaid patients pales in comparison to the $600 to $700 million in annual revenue for the two hospitals, said Gary Bryant, Hahnemann’s CEO, its fourth since American Academic took over in January 2018. And, it’s not clear if the state will be receptive to Hahnemann’s plea.

The Pennsylvania Department of Human Services, which manages Medicaid, said: “Hahnemann Hospital is an important resource in Philadelphia, and we are monitoring the situation closely. We are hopeful that a solution can be found so people served by Hahnemann do not lose access to the hospital and face barriers to care.”

Meanwhile, patient volume is falling rapidly, and it might be impossible to cut expenses fast enough. The number of patients at Hahnemann has fallen to a range of 200 to 250 a day, down from the high 200s in early 2018, Freedman said.

“Because there’s such a high fixed cost, fixed expense infrastructure in a hospital, it’s very difficult to flex down your expenses in direct proportion to the drop in volume. It’s never one for one,” said Dan Grauman, chief executive of Veralon, a Philadelphia health-care consulting firm.

Impact on patients

What about patients? Will they lose access if Hahnemann closes?

Stuart Fine, a professor in Temple’s College of Public Health, doubts it. “I don’t believe there would be a sizable population of people who would be left unserved," Fine said. "It’s walking distance to Jefferson, a five-minute subway ride to Temple, and not much further to Penn.”

The loss of Hahnemann would not disrupt medical education for Drexel students, university president John Fry said. “We have 20 other affiliated training sites” and contingency plans in place, he said.

Fry said he remains optimistic that Hahnemann can be saved and is ready to help. “If there was a clearly articulated strategy for growth and driving new volume, we would be the first to embrace that,” he said.

It would be a terrible loss to Philadelphia’s health-care ecosystem if Hahnemann closed, according to Fry who has a family member who was a patient there not long ago.

“It was a very good experience. Now, were the facilities as nice as other hospitals'? No. But there was a distinct culture and character to that experience that you can’t fake,” he said.