Clarian North’s slow launch doesn’t bother bond analysts

Clarian North Medical Center has stumbled out of the gate, with the Carmel hospital reporting losses in its first six months of operation that "well exceed" expectations, a new report says.

Inpatient volumes at the 182-bed Clarian North also "have been slower to materialize than anticipated," according to the report by New York-based Moody's Investors Service Inc.

Indianapolis-based Clarian Health Partners opened the $285 million hospital in December at 116th Street and U.S. 31. Clarian owns 64 percent of the for-profit hospital, as part of a joint venture with doctors who own the remainder.

The Moody's report doesn't say how much the hospital lost. A state filing shows it brought in $43 million in revenue while registering $71 million in expenses during the first half of 2006.

A Clarian Health spokesman wouldn't discuss the hospital's financial results or patient counts, but said officials are satisfied with its start.

Despite the losses, Clarian Health's overall financial health remains excellent, say analysts who rate its bonds. The hospital network posted a $73 million profit in the first half of 2006–exceeding the $69 million it earned all of last year.

"It's something that's not of great concern to us at this point," said Jim LeBuhn, an analyst with Fitch Ratings in Chicago. "Anytime that you start a new facility, it's great if you hit the numbers dead on, but it's not out of the ordinary to fall below budget."

John Goldenberg, one of the doctors who invested in Clarian North, said its operating rooms have been full and patient volume has been "phenomenal" over the first eight months.

"Clarian North is going to be around a long time, and numbers over a quarter or two quarters really don't faze me whatsoever," said Goldenberg, an ear, nose and throat specialist. "As a long-term project, I think it's been off to a gangbusters start, really."

State filings show Clarian Health's other suburban project, Clarian West Medical Center, started slowly, too. The $170 million hospital, which is 80-percent owned by Clarian and 20-percent by doctors, opened in December 2004.

It lost $13 million that year, mostly due to startup costs. Combined, Clarian West and Clarian North lost $45 million in 2005, with operating expenses outpacing revenue by $31 million.

Clarian launched its expansion strategy as a way to meet growing health care needs in the suburbs and to support its three downtown hospitals, Methodist and Indiana University hospitals and Riley Hospital for Children.

The suburbs are filled with patients covered by commercial insurance, which provides better reimbursement for health care services than do government programs like Medicaid or Medicare.

However, patients don't necessarily flock to a new hospital as soon as it opens. That's one of many reasons they normally start in the red.

"You should expect a loss for most startups at the beginning," said William Thompson, a managing partner at the Indianapolis law firm of Hall Render Killian Heath & Lyman, which specializes in health care. Thompson doesn't represent Clarian.

New hospitals typically have larger staffs than their initial patient loads would justify. And that staff can be expensive.

"You're often pulling staff from your competitors, and your competitors are not going to sit idly by," he said, noting that other hospitals will boost marketing and physician-relations efforts to grow their own programs. "There's certainly some competitive backlash that occurs."

New hospitals also often have to grapple with a few surprises, such as bugs in technology systems. At the same time, cash flow starts as a trickle. Government payers, in particular, can take as long as three months to reimburse for initial treatments.

In Clarian North's case, it also faces acute competition. The hospital shares a ZIP code with the 124-bed St. Vincent Carmel Hospital. It also must battle for patients with several diagnostic and imaging services that line U.S. 31.

Even so, an expert on health care management said the $31 million gap between revenue and expenses at Clarian's two new hospitals last year seems unusually large.

"With the expenses, it sounds like they staffed up the hospital but didn't get the patients they anticipated," said Dr. Kevin Schulman, director of Duke University's health-sector management program.

He isn't familiar with either medical center, but he said hospitals partly owned by doctors typically start faster than most because physicians become more active in recruiting patients.

However, Clarian spokesman Jon Mills said the hospital network is happy so far with results for both new hospitals.

"Right now, we're experiencing steady growth and pleased with the direction all the hospitals are going," he said.

Goldenberg, the doctor who invested in Clarian North, is equally upbeat.

He said Clarian North has unique characteristics that make it hard to handicap its performance out of the gate. For instance, doctors are heavily involved in planning and leadership, which is rare for a general service hospital.

He also thinks performance projections for the hospital may have been off base because they were based on 3- or 4-year-old data.

Both Fitch and Moody's are concerned about the debt Clarian has taken on for its capital projects. But Fitch also expects the two new hospitals to become profitable by 2008.

The bond-rating service said they should strengthen Clarian's competitive position in central Indiana long term–more than making up for the short-term losses.

"Fitch believes these projects will allow Clarian to capture additional market share in high-growth areas surrounding Indianapolis while strengthening its hub-and-spoke model in a competitive market," the rating agency said in a report.

Mills said Clarian also takes the long-term view. And he does mean long term.

"We've basically told those communities we'll be paying property taxes, we'll be part of the community, for 100 years," he said. "In North's case, it's only eight months out."