Philly’s tough hospital market — not greed — did in Hahnemann

Many observers — from former presidential candidate Bernie Sanders to Philadelphia Mayor Jim Kenney — saw a simple reason for the closure last summer of Hahnemann University Hospital: greed.

That line of thinking goes like this: Joel Freedman, the California businessman who in early 2018 bought Hahnemann and St. Christopher’s Hospital for Children from Tenet Healthcare Corp. for $170 million, intended from day one to close Hahnemann and make money off the real estate.

But the actions he took before Freedman announced the closure of Hahnemann on June 26, 2019, do not support that view. Far from rapidly shutting the place and shopping its real estate, Freedman repeated steps to try to raise the money to save the facility, as others involved in the case confirmed. Ultimately, he couldn’t rescue a declining business locked in the low end of a brutal hospital market.

One big problem was the mix of physicians at Hahnemann, which included some in private practice, others employed by the Drexel University College of Medicine, and some who worked directly for Hahnemann. That lack of alignment made it almost impossible to set a strategy. That problem was coupled with a heavy reliance on Medicaid, which put Hahnemann in the difficult position of being “a for-profit hospital serving the underserved without city or state sponsorship,” Richard Hamilton, chair of Drexel’s Department of Emergency Medicine, wrote in an analysis of the Hahnemann failure.

“There is no better formula for disaster than to work harder and harder to deliver optimum health care while losing more money in the process,” Hamilton concluded in the journal Academic Medicine.

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In Philadelphia, only Einstein Medical Center Philadelphia and Temple University Hospital in 2018 had a larger percentage of their patients on Medicaid, which pays below cost for the care of thousands of low-income Philadelphia residents. That makes it extraordinarily difficult for those hospitals to stay in business.

Freedman, an investment banker by trade with no expertise in running hospitals, believed he had a formula for doing what Tenet, a national, well-respected hospital operator, had failed to do for 14 years in a row — at least break even at Hahnemann.

One of the keys was to convince doctors to do a better job documenting the condition of patients and the care they were provided. That would have brought in more revenue from insurers. Freedman also sought more state aid. This was an approach that Freedman says had previously helped him rescue other hospitals in California.

But he ran into financial trouble almost from the start in Philadelphia. He blamed Tenet for misrepresenting the hospital’s financial condition and for ongoing problems with services that Tenet was supposed to provide. Tenet and Freedman have sued each other over those allegations in Delaware Superior Court. Tenet has sought a dismissal, but COVID-19 has stalled the case.

“The business was literally dead on arrival. It wasn’t just the burn rate,” said Freedman, referring to the amount of cash that Hahnemann was losing every month. The number of patients coming to the hospital was also declining, he said.

By May 2018, it was clear that Hahnemann wouldn’t make it without government help, Freedman said.

» READ MORE: Hahnemann University Hospital closed after many years of losses

Hahnemann officials met on mid-2018, with state officials and asked for a loan, according to a timeline provided last summer by the spokesman for the governor’s office. State Medicaid officials said legal reasons barred a loan, but the state allowed Freedman’s company to delay certain payments to the state.

“I think there was an awful lot of uncertainty about whether Hahnemann would survive,” Freedman said last month. “Honestly, I don’t know that the state wanted to throw good money after bad.”

Financial conditions at Hahnemann only worsened, and more efforts to raise money followed.

In September, Freedman borrowed $15 million from MidCap Financial, which had already helped finance his purchase of the hospitals, to sustain operations. In December and January, Freedman was working on a $170 million refinancing with Credit Suisse, but that fell apart when Hahnemann’s finances took another sharp dive.

Freedman’s next move, starting in late February 2019, was to see whether he could sell Hahnemann and St. Chris to Drexel University, which had used Hahnemann as the main teaching facility for its medical school. The price was $100,000 and included some of the Hahnemann real estate. But the offer also included liabilities estimated at $300 million, according to Drexel. Freedman thought that Drexel, as a nonprofit, might have better luck wrangling help from Harrisburg.

Drexel, which later bought St. Chris out of bankruptcy in a partnership with Tower Health, ended those talks in late May 2019, declaring, “we do not believe that [Hahnemann] has any financial value,” according to court records.

The last talks about additional state aid were held on June 11. Fifteen days later, Freedman said Hahnemann would close. Bankruptcy followed a few days later.