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Analysis reveals “red flags” for Steward’s finances

April 24, 2012

Steward Health Care System may own 10 hospitals in Massachusetts, but it’s on shaky financial footing.  That’s according to an audit an analysis of the finances for the hospital chain that wants to purchase Landmark Medical Center in Woonsocket.

The Department of Health has confirmed that Enterprise Management Corporation conducted the audit the analysis for the state’s health systems planning. DOH is currently reviewing Steward’s application to buy Landmark.

In the audit the analysis, Enterprise Management’s president Michael Kraten says he was unable to access Steward’s financial business plans, but according to the company’s “Consolidated Financial Statements” there are a number of “red flags” concerning Steward’s financial health.  Among Kraten’s concerns-

  • Steward’s estimates for its liabilities for the next year outweighed its assets by $43.6 million dollars.
  • As of September of 2011, Steward’s pension plan was underfunded by $263.9 million dollars, less than 56% funded.
  • Steward had a net loss of $56.9 million dollars during fiscal year 2011.

Kraten advises the Department of Health to get “detailed information” about Steward’s plans to address these financial problems before it concludes its review of Steward’s proposal to buy Landmark.

You can read the entire audit document yourself here.  Steward hasn’t yet responded to a request for comment.

UPDATE: Rhode Island’s Health Services Council discussed this audit analysis at a meeting today but Steward representatives said they didn’t want to talk on the record with me about the report.  The Department of Health didn’t allow Michael Kraten to talk with me either. I missed the beginning of the meeting where the audit the analysis was discussed, but there might be an audio recording. When I get a copy I’ll transcribe some of the relevant responses.

In Steward’s defense, this audit  analysis was based on financial information from September of 2011 when the hospital chain was in its infancy and leaning heavily on Cerberus, its parent company. That’s not the best time to judge an organization’s stability. It’s possible Steward is more stable now.  The Services Council pressed Steward to respond to the audit’s report’s questions in writing if possible within the next 48 hours. Those responses are public record, so I’ll throw those up when they’re available.

UPDATE TWO: Apologies for characterizing this as an “audit”.  Please see the comments below from Michael Kraten clarifying the nature of the financial analysis.

4 Comments leave one →
  1. Michael Kraten, PhD, CPA permalink
    April 25, 2012 6:38 am

    Good morning, Megan:

    It was a pleasure meeting you yesterday. Please forgive me for imposing this message on your blog page; I believe that it’s appropriate for me to ask you to correct an inadvertent mischaracterization of my activities.

    I actually did not conduct an “audit” for the Department of Health or for Steward. Instead, as I noted in my letter (which you have indeed posted online), I read the financial statements that were audited by the global “Big Four” accounting firm Ernst & Young, and then I prepared a list of observations.

    As I (also) note in the letter, I was not granted access to the financial business plans (or other internal documents) of Steward, and so I could not possibly have completed an audit. In order to complete an audit, a CPA requires unrestricted access to the internal books and records of an organization.

    I’d be more than happy to chat with you at any time about the nature of audits, the state of the health care industry, or any other general market information. I regret, though, that the Department of Health has asked me to refrain from issuing public comments about the Steward / Landmark transaction at this time.

    By the way, I do appreciate your efforts in disseminating news of these important events via your blog. We all need to understand the nature of the events that are transforming the health care industry, and blogs like yours serve the public interest by helping us to do so.

    All the best,
    Mike Kraten

    • April 25, 2012 9:39 am

      HI Michael-

      So sorry to use the wrong wording for your financial analysis. I will fix that right away. Thank you for making yourself available.

      It’s easier for me to get these things right when I’m able to conduct clarifying interviews. We could have cleared this up yesterday, or the day before when I left two phone messages for you. But I understand that you work for the Rhode Island Department of Health and have to respect its wishes.



  2. Moe Howard permalink
    April 25, 2012 1:02 pm

    Read the report, heard the responses from Steward. The consultant did a reasonable job identifying issues of concern. That said, nothing is changed. Steward is still the only ready choice other than closure. PRC and HSC likely to recommend approval with conditions. The conditions will, for all practical purposes, be unenforceable once the new licenses are issued. So don’t get too hung up on conditions. Also, Steward’s offer to permit the AG to oversee the implementation of the Asset purchase agreement is a mere sop- the AG would have no meaningful means of enforcing aspects of the APA once the deal is consummated. My sense is increasingly that Steward wants this entry into little RI very much. Any reports on progress regarding the court ordered Blue Cross LMC mediation? The mediator is making some money anyway . . .

    • April 25, 2012 1:10 pm

      Thanks Moe!

      Haven’t heard anything on the BCBSRI mediation. I’ll put something up here if I do.

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