Months of negotiations to sell Jewish Hospital have yet to yield a deal

The hospital scored a D on a national ranking system judging patient safety for three years in a row

The future of U of L's relationship with Jewish is up in the air and may impact its accreditation

Clarification: The proposed transaction between KentuckyOne parent Catholic Health Initiatives and Dignity Health is a merger. The nature of the deal may not have been clear in an earlier version of this report.

Jewish Hospital is likely to close as its owner continues to lose money after months of negotiating to sell it and other local facilities to a hedge fund, according to a doctor who has written about the local health care industry.

"I would not be surprised for Jewish Hospital to close its doors within a matter of months," Dr. Peter Hasselbacher, a retired University of Louisville medical professor, told the Courier Journal. "I wish the best for them, but I think the odds are stacked against them."

Hasselbacher's concerns are shared by five other doctors and five current KentuckyOne staff members in a variety of roles, as well as a former administrator with knowledge of the negotiations. They shared information with the Courier Journal on the condition of anonymity because they aren't authorized to discuss the matter and due to their employment with or other professional ties to KentuckyOne and the university.

Many of these individuals expressed doubt that KentuckyOne — which employs 4,800 workers in the Louisville area — will be able to strike a deal to sell Jewish to BlueMountain Capital Management, a $21 billion New York hedge fund, and worry that the health system's flagship hospital could go under as a result.

"I think it'll close. I'd bet money on it," said a longtime local doctor with experience at both Jewish and U of L. "How long can you keep hemorrhaging money like that? How long is it before you finally pull the plug and say, 'This place is dead. I can't stop the bleeding.'

"I hope I'm wrong."

KentuckyOne interim president and CEO Chuck Neumann told employees Friday that executives have no plans to close Jewish, but added that they're making contingency plans in case they can't reach an agreement.

The fate of Jewish holds huge implications for the University of Louisville and its teaching mission, for patients from across the region and for the organ transplant program housed at Jewish and staffed by university doctors and medical residents.

"At this point, we really are trying to be prepared for everything," U of L President Neeli Bendapudi said of KentuckyOne's negotiations and the future of its facilities in Louisville.

KentuckyOne and BlueMountain announced in December that they were entering negotiations, but have set new deadlines for closing the transaction. Neumann — who declined to be interviewed but released responses to questions through a spokesman — said the deal with BlueMountain is still on the table.

Neumann said "a complex due diligence and transaction process" has led to the delay with the hedge fund.

BlueMountain spokesman Tom Vogel also declined to discuss specifics but reiterated that the negotiations are ongoing. "We are working with all stakeholders to continue the legacy and excellence of Jewish Hospital," he said in an email.

KentuckyOne's Denver-based, debt-ridden parent, Catholic Health Initiatives, announced in May 2017 that it would sell off its Louisville assets, chief among them the 462-bed Jewish Hospital, in a bid to shed facilities that were losing money.

KentuckyOne and BlueMountain's announcement of negotiations in December allayed fears that the health system couldn't find a buyer.

But several signs point to trouble for Jewish, which needs more than $200 million in upgrades. Worse, it's received D ratings in recent years from a nonprofit health care watchdog that evaluates patient safety.

The hospital opened in 1905 to provide care for Jewish immigrants and others, regardless of race or creed. Its reputation grew between the mid-1960s and the 1990s for pioneering research in heart transplants and more recently hand transplants.

But the stellar run was tarnished by a flurry of lawsuits tied to several patient deaths starting in the mid-90s that lawyers alleged were linked to a deadly airborne fungus. Like many large institutions, Jewish was hammered by the recession, and more recently by reduced government reimbursements, soaring technology costs and a push to minimize hospital stays.

By many accounts, the decline at Jewish, where 1,000 nurses and other staff are on the payroll, has accelerated since KentuckyOne announced its Louisville facilities were up for grabs.

The sale to BlueMountain originally was expected to include Jewish; Frazier Rehab Institute; Sts. Mary & Elizabeth Hospital; Medical Centers Jewish East, South, Southwest and Northeast; Jewish Hospital Shelbyville; Saint Joseph in Martin; and several doctors' practices.

St. Joseph was sold to Appalachian Regional Health in June. Our Lady of Peace Hospital, a profitable psychiatric hospital that KentuckyOne initially intended to keep, is now part of what's on the block with BlueMountain.

But the hedge fund now wants Jewish out of the bundle, according to the longtime doctor with ties to Jewish and U of L and a local health care executive.

If Jewish is going to close, Hasselbacher said, the community needs time to prepare. People's jobs are on the line and patients have health care problems they need to plan for, he said. This eventuality is painful for all involved, but "we've been going in this direction for a long time."

"It would be a betrayal of the community just to close the doors with 30 days or 60 days' notice. We deserve more than that," said Hasselbacher, who once had admitting privileges to the hospital. "This situation is too important to be left in the hands of outside businesses in the dark."

More:BlueMountain Captial, the firm pursuing Jewish, is no stranger to Louisville

See also:Jewish Hospital and other KentuckyOne assets won't sell until mid-2018

Jewish Hospital struggling

Only limited data about KentuckyOne's finances are public, but the available information doesn't bode well for the nonprofit or its facilities.

Jewish and Sts. Mary and Elizabeth Hospital lost a combined $41 million in operating earnings during the nine months ended in March, and that loss was nearly $13 million more than the same stretch in fiscal 2017, according to the last earnings report from Catholic Health Initiatives.

It's not clear how the losses are affecting day-to-day operations at Jewish, but sources say that this summer a number of pathologists were let go and several cardiologists tied to both Jewish and U of L have left for other jobs.

"They are voting with their feet," said one doctor who works part time at Jewish.

Neumann, KentuckyOne's CEO, didn't directly address a Courier Journal question about the loss of doctors, but said recruitment and departures are normal for a health system and "during times of transition, it is not surprising that this activity can increase."

Quality also has been a concern at Jewish in recent years. The hospital scored a D on the Leapfrog Hospital Safety Grade, a national ranking concerning patient safety, in 2016, 2017 and spring 2018. It also earned a D in the spring of 2015 but scored a C in fall 2015.

Another cloud over the local transaction involves the delay in the merger between parent Catholic Health and Dignity Health, a sprawling California-based religious health system.

Despite agreeing to merge two years ago, no date has been set for closing the mega-deal worth an estimated $28 billion in annual revenues, and concerns have been raised about CHI's continuing losses, according to documents filed with the California attorney general's office.

If BlueMountain ultimately buys KentuckyOne's facilities, it wouldn't be the first time it has made a high-profile health care deal.

BlueMountain agreed in late 2015 to assume operation of six California hospitals, now known collectively as Verity Health. A majority stake in Verity's management company was later sold to a business run by billionaire surgeon and entrepreneur Dr. Patrick Soon-Shiong, but BlueMountain promised to keep investing in the system's revitalization despite the management transition.

Last month, Verity Health filed for Chapter 11 bankruptcy protection.

“Despite many efforts over the last decade to create opportunities for success, we can no longer swim against the tide of our operating reality," Verity Health CEO Rich Adcock said in a news release. He cited aging infrastructure and a "legacy burden" of bond debt and unfunded pension liabilities among their challenges.

Background:KentuckyOne Health to sell off Jewish Hospital, other Louisville facilities

See also:Are future hand transplants at Jewish Hospital in jeopardy?

Private equity loses interest in hospitals

It's rare for a private equity firm to buy a hospital in the current market, especially one that's financially troubled, said Neil Sehgal, assistant professor of health services administration at the University of Maryland's School of Public Health.

Instead, private equity money is pouring into more profitable health care buys, like outpatient operations, Sehgal said.

There is great interest in limiting the number of people whose problems become serious enough to require inpatient treatment — part of a larger shift in focus toward prevention within the health care industry, Sehgal explained.

"Our goal in health care isn't to fill hospital beds," he said. "Our goal in health care is increasingly to keep people out of the hospital."

Roughly 25 percent to 50 percent of hospitals in the U.S. lose money every year, Sehgal said, and even high-performing ones have thin profit margins.

"We're seeing hospitals close all over the country," he said. "And often they're storied hospitals that are 50, 75, 100 years old. We're seeing them close because of financial losses."

It's difficult, but not impossible, to turn a struggling hospital around, Sehgal said. Strong leadership is key because "hospitals are like battleships — it's hard to turn one."

Also, losing leaders can be symptoms of deeper organizational problems, Sehgal said. KentuckyOne ousted the president and chief nursing officer at Jewish last year.

Related:University of Louisville Hospital says it's on mend minus KentuckyOne

See also:Trustee says U of L faces risks if KentuckyOne sells

Unsure future for U of L partnership

The university's relationship with KentuckyOne has been rocky, but the two still maintain professional ties.

KentuckyOne managed U of L Hospital in downtown Louisville beginning in 2013, but the university resumed running that operation last year after a state inspection found nursing deficiencies had endangered three patients.

University officials say the state-owned hospital and its reputation have regained strength more than a year after the change in management, but Louisville and KentuckyOne are still partners on other initiatives, such as the organ transplant program.

Whether the relationship stays intact is unclear. The university's current academic affiliation agreement with KentuckyOne — which provides for 51 medical residents at Jewish and five at Frazier Rehab Institute facilities, among other stipulations — expires Dec. 31.

University officials did not answer questions about whether an extension is in the works with KentuckyOne or if a new contract is being negotiated with BlueMountain.

KentuckyOne offered limited information. "Any relationship [beyond the end of the year] ... is being discussed by the parties," KentuckyOne spokesman David McArthur said.

Greg Postel, a top U of L health affairs official, indicated the university has not been involved directly in the negotiations between BlueMountain and KentuckyOne.

U of L is "working to gain clarity around how all of our programs will remain viable in the event a deal between the two parties is not reached," Postel said in an email.

Maintaining a presence in local hospitals and specific health programs is important for U of L from an accreditation standpoint.

The Liaison Committee on Medical Education is the accrediting body for M.D.-granting programs and expects accredited medical schools to have sufficient clinical training resources for students, according to Dr. Veronica Catanese, the group's co-secretary.

If a major training site like Jewish closes, a school wouldn't be in immediate jeopardy of losing its accreditation but should notify the liaison committee and search for new clinical opportunities, Catanese said. Such problems usually don't arise without warning, and U of L isn't scheduled for another accreditation review until 2020.

"This has been talked about so much in the Louisville community," she said of KentuckyOne's situation. "I'm sure it is very much on the radar screen of the university."

GIVE US A CALL

Reporters Grace Schneider and Morgan Watkins have been covering the Jewish Hospital situation for the Courier Journal. If you have any information to share, you can reach them by phone, email or Twitter, as detailed below.

Grace Schneider: 502-582-4082; gschneider@courierjournal.com; Twitter: @gesinfk.

Morgan Watkins: 502-582-4502; mwatkins@courierjournal.com; Twitter: @morganwatkins26.