St. Vincent’s Is the Lehman Brothers of Hospitals

The shuttered doors of a St. Vincent's ambulance bay.Photo: Matt McDonough

Mohamed Abuelenen, a 55-year-old construction worker, was having trouble breathing when he showed up at St. Vincent’s Hospital in the West Village a bit before seven in the morning on April 30. He was admitted to the emergency room, where his vital signs were taken and his chest was examined. A heart attack was ruled out. So was asthma. Before long, Abuelenen was diagnosed with nothing more than a bad cold. His visit was entirely routine, in fact, but for one detail: He was St. Vincent’s last patient.

By the time Abuelenen left the ER, an hour after arriving, the hospital had closed shop. Before that day, it had treated more than 50,000 people per year and seen hundreds of thousands more in its clinics and other outpatient facilities. But now workers were boarding up windows and doors, boxing up supplies, and dismantling equipment. St. Vincent’s was $1 billion in debt and had for some time been losing an additional $10 million a month. The once-unfathomable idea that a high-profile hospital in an affluent Manhattan neighborhood would be allowed to close had become reality. The hospital’s venerable history—over 160 years, it had treated victims of the Titanic, the Triangle Shirtwaist factory fire, the AIDS epidemic, and 9/11—had not saved it. Nor had its location as the only hospital on Manhattan’s West Side below 59th Street. St. Vincent’s failure left 3,500 employees jobless and 200,000 New Yorkers without their nearest hospital.

St. Vincent’s plight has been portrayed by public officials and the media as a story of local misfortune—a community losing a vital piece of its infrastructure and a centerpiece of its identity to a combination of mismanagement, the recession, and bad luck. The truth, though, is considerably more alarming. St. Vincent’s collapse is only the most visible symptom of an ongoing financial emergency facing the city’s five dozen remaining hospitals and threatening those they serve. In a sense, St. Vincent’s is the Lehman Brothers of the local hospital industry: an institution whose dramatic disappearance, once unthinkable, raises dire questions about the viability of the entire system.

The financial health of New York City’s hospitals has been deteriorating for years and appears to be nearing a critical juncture. Within weeks of St. Vincent’s demise, Lenox Hill, the boutique hospital of choice for Upper East Siders, long saddled with operating losses and debt, bowed to economic pressure and agreed to a takeover by North Shore–LIJ, the state’s largest private-hospital system. A month later, North General, for 30 years a pet project of Harlem’s political elite, announced that it was shutting down. That made seventeen hospital closings in the city since 2000. Last year, a pair of hospitals in Queens closed suddenly, just before the outbreak of H1N1, causing overflow conditions in the emergency rooms of nearby facilities, one of which set up a triage area on a loading dock. The year before, Brooklyn and Queens had each lost a hospital, and Manhattan had lost two.

Unlike St. Vincent’s shuttering, most of these closures took place in neighborhoods with little political clout or public visibility, and few people outside the affected communities appeared to notice. That is unlikely to remain the case. The financial distress of New York hospitals is not evenly distributed, but it is nearly universal. Even the largest and most prestigious institutions—New York–Presbyterian, Mount Sinai, and the like—get by with thin margins and significant piles of debt. Some presumed high-quality hospitals, like Beth Israel and Roosevelt, operated by the Continuum Health Partners consortium, have a legacy of steep losses and indebtedness, and are considered precarious. In New York’s many community hospitals, which provide an essential first line of defense in the effort to safeguard public health, the danger of failure is particularly acute. Combine growing costs, decreasing revenues, and high debt loads, and you can’t dig out. Then what happens? “If you’ve accumulated any reserve over time,” an executive at a major local hospital says, “the first thing you do is eat it up. Then you cut costs on staffing and support services, sometimes below levels you know are safe. Then you stop spending money to keep your physical plant and equipment up to date. The condition of the physical plants of many New York City hospitals is staggering. Then, when there’s nothing else you can do, you declare bankruptcy. That’s the life cycle of a New York hospital.”

The bottom line is sobering: In 2008, local hospitals spent $3 billion more delivering care than they took in. Overall, they operated at a 6 percent loss—an average that masks much deeper red ink at the worst-performing places. In contrast, hospitals nationwide have earned average profits of about 4 percent over the past decade. Within the hospital industry, a 3 percent surplus is considered necessary just to keep a hospital in decent working order. The only way unprofitable hospitals can do that is to enter a vicious cycle of indebtedness. New York’s hospitals carry twice as much debt in relation to their net assets as hospitals around the country, a fact that constrains their ability to continue borrowing money. When they do manage to find willing lenders, they are forced to pay high interest rates. “There is a cost to being poor, and it only makes you poorer,” says Sean Cavanaugh, director of health-care finance at United Hospital Fund, a nonprofit health-care-research group.

An abandoned St. Vincent's surgical recovery unit.Photo: Matt McDonough

Indeed, it may turn out that profound problems with the ways health care is paid for, combined with the inherent disadvantages of doing business in New York, will make it virtually impossible for all but a small number of the city’s hospitals to stay afloat. If that’s the case, the health of low-income and minority residents will be most affected, but even New Yorkers who currently have access to high-quality care will feel the impact. Remaining hospitals, struggling to cope with the costs imposed by an influx of new, mostly poor patients left behind by the places that shut down, will increasingly be overcrowded and understaffed. Services will be curtailed. Facilities will be degraded. Long waits and uneven care could become the norm.

“We’ve got a lot of hospitals in trouble,” says Kenneth Raske, the president and CEO of the Greater New York Hospital Association. “More closures will undoubtedly take place. I’ve been doing this job since 1984, and people used to say I was crying wolf when I warned about a crisis. No one says that anymore. In some communities, we’re one epidemic away from a disaster.”

Why are New York hospitals so unstable? Consider the case of Anna, a not atypical 62-year-old resident of Queens. Anna complained of chest pains. It was not the first time she was acutely ill. She had been living with kidney disease, congestive heart failure, mitral-valve disorder, and chronic pulmonary disease. She managed to get herself to the emergency room of her neighborhood hospital, where she was given an EKG and blood tests. It was determined she had had an acute myocardial infarction—a heart attack.

Because of the complexity of her medical history, physicians arranged for Anna’s transfer to one of the city’s largest and best-known hospitals, which boasted substantial technical wherewithal and a staff of top specialists. Soon after being admitted, she underwent diagnostic cardiac catheterization, including angiocardiography, in which an opaque fluid is injected into a chamber of the heart in order to observe blood flow. The test is typically used to determine the need for heart surgery. (Anna’s doctors decided against this measure, perhaps because her overall condition would have made operating too risky.) Anna spent the next three days in the hospital’s coronary intensive-care unit. She received a pair of CT scans and a round of dialysis. When her condition stabilized, she was moved to a semi-private room in a general-medicine unit, where she stayed another three days. Then she went home. During Anna’s six-day stay, the hospital spent $19,254 on her treatment.

Virtually every item that contributed to the hospital’s total cost of caring for Anna was more expensive in New York than it would have been elsewhere. Labor makes up some 60 percent of a hospital’s overall expenditures, and New York has among the highest labor costs in the country—a reflection of the enduring strength of its unions. The demands of an urban setting—more acute cases, more-diverse patients—require higher staffing levels than elsewhere, and in New York City there are 5.6 workers for every patient in the hospital on a given day, a figure about 15 percent higher than the national average. Executives, too, are paid more than their counterparts in other places. In 2008, Herbert Pardes, the president and CEO of New York–Presbyterian, reportedly received $9.8 million in total compensation; Miguel Fuentes, head of the comparatively small Bronx-Lebanon, took in $4.8 million. New York’s hospitals have the oldest “age of plant” in the country, and vintage properties are expensive both to run and to retrofit to contemporary standards. The New York Building Congress reports that hospital construction in New York City costs $600 per square foot, two and a half times the national average and still 50 percent higher than in other expensive cities, like San Francisco. The mid-nineties, 700-bed addition to New York Hospital, which involved floating a platform up the East River and setting it atop the highway with cranes operated from tugboats, took three years to complete and cost $1 billion—nearly $1.5 million per bed. Just as the price of consumer goods is higher in New York than elsewhere, so too is the cost of everything from MRI machines and CT scanners to medical supplies and linen services. And local hospitals’ epidemic indebtedness makes that problem worse. “Vendors know that the financial condition of most New York City hospitals means they’ll get paid very slowly, or perhaps not at all,” says John Lavan, a hospital consultant and the former chief financial officer of New York–Presbyterian. “They protect themselves by embedding the cost of their risk into the prices they charge.” Because New York City juries are famously friendly to plaintiffs, malpractice premiums here are double the national norm.

Another view of the surgical recovery unit.Photo: Matt McDonough

Perhaps New York’s most daunting challenge is demographic. The city’s large populations of elderly and low-income residents and illegal immigrants tend to live in neighborhoods with few private physicians and receive little primary care. People in those groups are more likely to arrive at the hospital with chronic, undertreated conditions like diabetes and hypertension accompanying their more urgent ailments. These same patients suffer from substantial rates of mental illness and substance abuse, which makes treating them more complicated and expensive. They often come into the hospital through emergency rooms, which are required by law to treat anyone regardless of ability to pay and where the cost of care is much higher than it is in other settings. New York hospital patients tend to stay in the hospital longer than others; the city’s average of 6.6 days per hospital stay is more than a day longer than the national average (older people can’t be sent home to walk-ups until they’re capable, non-English speakers require translators to provide discharge instructions, and so on). Insurers pay a flat fee, and often dictate the length of stay, for a particular diagnosis. If a patient stays longer than that, the cost is on the hospital. The New York State Department of Health estimates that hospitals statewide would save $3.4 billion annually by reducing lengths of stay to national standards.

Although the Obama health-care plan is expected to extend medical insurance to about half of the 1.4 million New York residents who are currently without it, the city will still remain home to a disproportionately large population of people who lack health coverage. Joel Perlman, the chief financial officer of Montefiore Medical Center, the dominant hospital in the Bronx, says that at Montefiore, 80 percent of the cost of treating the uninsured is absorbed by the hospital. In any event, whatever boost in coverage the Obama plan provides for hospitals will be largely offset by cuts to Medicare that are slated to pay for half the cost of the new program. And the law’s explicit exclusion of illegal immigrants from its benefits means that the city’s hospitals—rather than the state or federal government—will bear the burden of providing uncompensated service for hundreds of thousands of people. “Undocumented individuals get sick,” says Raske. “They show up at hospitals, which, for a variety of moral and legal reasons, take care of them. If an institution is in a location with a lot of undocumented people, as half the hospitals in New York are, it is highly vulnerable.”

The revenue side of the equation is equally unforgiving. Even as New York hospitals’ costs exceed national norms, their sources of income are being diminished. Hospitals receive income from four main payers: Medicaid (the state-run program that provides coverage to low-income residents), Medicare (the federal program that insures the elderly and disabled), private insurance (provided mostly by employers), and direct payment from patients (either those who are uninsured or those whose insurance plans require them to pay for part of the cost of care). According to United Hospital Fund, close to one third of non-elderly New Yorkers were enrolled in Medicaid in 2008—a rate of public-insurance coverage that is more than 75 percent higher than that of the country as a whole. Those 2.3 million Medicaid recipients use a disproportionate amount of hospital services, making up 39 percent of the city’s hospital patients, but the hospital industry complains that since 2007 the New York State Legislature has cut Medicaid funding nine times, at a cost of $900 million to local hospitals.

Medicaid is notorious for underpaying hospitals for their services. It typically reimburses about half the cost of an ER visit in the city. At one top-tier New York hospital, Medicaid covers 92 percent of the cost of treating patients with cranial bleeding, 81 percent of the cost of joint replacement, and 64 percent of the cost of a high-risk childbirth. “That’s how it goes,” says the chief operating officer of a small community hospital in the Bronx. “We’re asked to do a dollar’s work for 70 cents.”

Another 30 percent of New York’s hospital patients, meanwhile, are covered by Medicare. “Medicare used to be a good payer,” says Montefiore’s Joel Perlman. “But at this point, we do well to break even on those patients.” According to MedPAC, a congressional agency that analyzes data on Medicare, payments to hospitals by Medicare for inpatient services have steadily eroded since 1997, when the Balanced Budget Act was implemented, from a high of 18 percent above hospital cost to an average underpayment of 4.7 percent in 2008. All told, New York hospitals can expect to lose money on more than seven in ten people who come through the door.

St. Vincent's 12th Street entrance.Photo: Matt McDonough

In order to have a chance of balancing their books, then, New York hospitals are forced to rely on the revenues they receive from caring for the profitable 25 percent of patients in the city—those with private insurance. “The biggest factor in the financial condition of a hospital is payer mix,” says Perlman. “It’s all about how much Medicaid activity you provide, how much Medicare activity you provide, and how much commercial insurance you have.” It’s an uphill fight: Only half of non-elderly New Yorkers have private-insurance coverage—compared to 65 percent of non-elderly Americans overall.

Hospitals that can afford to do so compete vigorously for privately insured patients, spending millions of dollars in advertising to promote, in particular, their high-end, high-margin services, such as cancer treatment, cardiology, neurosurgery, and orthopedics. But this competition, fueled by the fact that New York has a number of highly regarded hospitals located in proximity to each other, pits financially strained facilities against one another (if you’re the Mayo Clinic or Johns Hopkins, you don’t worry about losing your patients to a hospital twenty blocks away). With so many hospitals in a limited geographic area, insurers can use the threat of dropping hospitals from their plans to drive down the reimbursement rates they pay. Although the rates negotiated between hospitals and insurance providers are withheld from public scrutiny—even state health and insurance regulators are denied the information—an American Hospital Association survey of providers in New York State indicated that private insurers reimburse hospitals an average of 17 percent above cost; nationwide, the average is 28 percent. (At the same time that New York has the nation’s poorest hospitals, it also has the country’s most lucrative health-insurance business.)

New York hospitals would save $3.4 billion annually by reducing length of stay to national standards.

The averages don’t tell the whole story. The city’s largest and most powerful hospitals, which are crucial to an insurer’s customers, exert their leverage to secure deals that are believed to pay well above the average margin; smaller hospitals, which are often located in low-income neighborhoods, have little choice but to accept the dismal rates dictated by insurers if they want to remain in the insurers’ plans. “When the big players take their cut, there are only scraps left for everyone else,” says the CEO of an outer-borough hospital. “United HealthCare couldn’t care less about having my hospital in their network. They tell me to take it or leave it.”

New York’s hospitals also vie with one another for physicians who attract well-heeled patients with good insurance. “There’s a perception that doctors will bring patient referrals with them when they join a hospital staff,” says John Lavan, the former New York–Presbyterian CFO. “Luring busy doctors who have an attractive payer mix is good for business.” Most doctors belong to small partnerships and are not salaried by the hospitals they staff, but hospitals woo them in other ways, by offering teaching stipends, health and retirement benefits, and choice office space. Medical-school-affiliated institutions like New York–Presbyterian, Mount Sinai, and NYU are said to spend between $10 million and $15 million to recruit leading physicians and researchers to head their clinical departments, but “even community hospitals engage in stiff competition,” Lavan says.

Some hospitals are able to tap the largesse of wealthy donors to help keep them in the black. Weill Cornell Medical College, which is part of the New York–Presbyterian system, was named for former Citigroup chairman Sanford Weill and his wife, who have donated close to a half-billion dollars since 1998; Kenneth Langone, the financier and Home Depot founder, received similar acknowledgment from NYU Langone Medical Center for his gifts of $200 million to the hospital since 1999. Mount Sinai is in the midst of a $1 billion campaign to fund research, recruit doctors, and erect two new buildings. Beyond the academic centers and specialty hospitals like Memorial Sloan-Kettering Cancer Center, however, charitable giving drops off precipitously. Continuum’s hospitals, with a budget of $3 billion, received just over $23 million in donations last year. Outside Manhattan, fund-raising is effectively nonexistent.

It’s possible that Anna, the Queens heart patient, cost so much to care for because she was administered too many tests, too many procedures, and allowed to stay in the hospital too long. That’s improbable, though, given the number of complicating factors in her case. A profile like Anna’s more likely reflects the price paid for years of inadequate primary and preventive care. Certainly, the hospital that cared for her had no financial incentive to pile on high-cost services. Anna lacked private insurance, so her bill was paid by Medicaid. Because of the gravity of her condition, the hospital received Medicaid’s highest rate of payment for her treatment: a total of $16,559. That sounds like a decent payday for six days’ work. But given the $19,254 it cost to get Anna well enough to go home, the hospital lost $2,695 on her care.

The emergency room.Photo: Matt McDonough

New York’s hospital system, like other major features of its critical infrastructure—subways, roads and bridges, schools—is rooted in the nineteenth century and has adapted itself haphazardly to contemporary demographics and economics. Most of New York’s hospitals were originally sponsored by religious, ethnic, or civic groups and emphasized neighborhood care. That was a functional notion in the days when medicine was mostly a low-tech, reasonably priced affair. But everything changed after the Second World War, with the explosion of advanced and increasingly costly technology. X-ray machines were replaced with CT scanners. Heart transplants and complex cancer therapies became commonplace. Breakthrough drugs were developed to treat previously intractable diseases. The average life expectancy of an American has risen from 69 to 78 years between 1960 and today. But at the same time, health-care spending has jumped from 5.2 percent of GDP to 17.3 percent. Even adjusted for inflation, the cost of a night in a U.S. hospital bed rose from $128 in 1965 to $1,289 in 2002, a tenfold increase.

New York has been a leader in the modern medical revolution. It is home to five major medical schools—with two others just outside city limits—and staffs nearly every local hospital with medical residents. (One in eight residents in the country is currently being trained in New York City.) New York also has a tradition of providing broad access to health care. In many states, children from families whose incomes are marginally above the federal poverty line don’t qualify for government insurance; in New York, children whose families earn four times the federal poverty level remain eligible for that. In most parts of the country, for-profit hospitals exclude poor patients from inpatient services, diverting them to substandard public hospitals; in New York, every private hospital is constituted as a nonprofit organization, subject to a web of federal and state regulations that oblige them to provide care to low-income and indigent residents. New York’s eleven city-run hospitals are also, by far, the largest municipal system in the country.

During the city’s fiscal crisis in the seventies, when many middle-class New Yorkers fled to the suburbs, leaving behind a higher proportion of poor residents, the city was hit by a wave of hospital bankruptcies. After Mario Cuomo was elected in 1983, his administration took tight control of the hospital industry. The model was that of a regulated public utility: In exchange for providing a socially essential service, the state would ensure a hospital’s profitability—barely. “It was small-s socialism,” one expert in hospital finance says. “The state set the reimbursement rates everyone, even private insurance companies, paid. The whole thing was centrally controlled, and if hospitals got in trouble, the state simply adjusted the rates. Hospitals survived but were prevented from building up reserves and were chronically short of capital.”

Then George Pataki took office in 1995, determined to allow hospitals to test their mettle in the free market by negotiating their own terms with insurers. It turned out to be an exercise in shock-therapy capitalism. Inexperienced at the bargaining table, hospitals engaged in intramural rivalry with each other, cutting unfavorable deals with insurers in order to hold on to patients in the short term. With their already thin margins pared down further by deregulation, many hospitals soon built up paralyzing debt loads. Even the largest and seemingly least vulnerable facilities decided that their best hope for survival was to get bigger. A flurry of mergers and buyouts ensued, and by the end of the nineties, the hospital system began to assume its current bewildering patchwork of partnerships and affiliations. Columbia Presbyterian and New York Hospital, both attached to elite medical schools, joined forces. NYU and Mount Sinai forged a deal (it later came undone). On the eastern edge of the city, North Shore hospitals merged with nearby Long Island Jewish, staking out an enormous swath of the hospital market on Long Island, Queens, and Staten Island. Beth Israel and St. Luke’s–Roosevelt, debt-ridden and left on the sidelines by the major academic hospitals, decided to try making a go of it together. It was unclear if bigger was actually better—for patients or the bottom line—but size seemed to offer hospitals a buffer against collapse.

By 2005, less than a decade into its dalliance with free enterprise, the city’s hospital system had taken on something of a post-Soviet tinge, with winners ruling the roost like oligarchs and losers reduced to a state of grim dependency. A pecking order emerged, with elite academic centers at the top, well-regarded independent hospitals like Lenox Hill in the middle, and community hospitals on the bottom. Yet even the prestigious academic centers continued to underperform financially by the standards of their peers around the country—whose margins are often two or three times as high—and on the whole, New York hospitals remained in a state of chronic financial distress. In 2005, when hospitals nationwide reported average profits of 3.7 percent, those in New York City were 1.3 percent in the red, with the weakest ones a lot worse off than that. Hospitals were closing across the city and the state.

The intensive care unit.Photo: Matt McDonough

Pataki, who had come into office preaching the ministry of the free market, performed a stunning turnabout. He summoned a team of investigators to probe the operations of every hospital in the state and offer legally binding proposals for a systemwide makeover. In 2006, the Commission on Health Care Facilities in the 21st Century—more commonly known as the Berger Commission, after its investment-banker chairman, Stephen Berger—issued its report. “The Commission reaches a stark and basic conclusion,” the executive summary read. “Our state’s healthcare system is broken and in need of fundamental repairs.”

The core of the problem, the commission held, was that the supply of hospital beds in New York far outstripped demand for them. That oversupply—a legacy of the days before drugs and technology made it possible to treat many serious illnesses on an outpatient basis—drove hospitals to begin fighting with one another to fill their empty beds, admitting patients who should have been treated in cheaper outpatient settings, keeping them in hospitals longer than necessary, and ordering an overabundance of expensive tests and procedures. “There was a keeping-up-with-the-Joneses mentality that led to a medical arms race,” says David Sandman, the commission’s executive director. “If the place across the street has a cardiac-catheterization lab, I have to have one, too, or I’ll lose that business.” The city’s hospitals were sinking into an even deeper financial hole.

As a remedy, the commission recommended eliminating 4,200 hospital beds statewide. Nine hospitals would be closed; 48 others would be called on to downsize or consolidate with neighboring institutions. There was a political uproar. “Nobody likes seeing a hospital close,” says Stanley Brezenoff, the president and CEO of Continuum and a former deputy mayor in the Koch administration. “In a lot of communities, the hospital is an anchor. There’s a feeling of decline when it’s gone.”

The commission gave extensive thought to what to do with St. Vincent’s, but eventually opted to leave it functioning as it was. (One St. Vincent’s leader speculates that closing the pride of New York’s Catholic hospital system might have led to such a furor that the rest of the commission’s work would have been undermined.) Perhaps shuttering nearby Cabrini and St. Vincent’s Midtown, and downsizing New York Downtown, in the financial district, would drive those hospitals’ stranded patients to St. Vincent’s. “You had to wait and see how the outcomes played out over time,” Sandman says. “It was a little like a game of dominoes.”

As recently as the nineties, St. Vincent’s was a relatively financially healthy concern. More than any hospital in New York, it was a haven for AIDS patients, developing considerable expertise in their care. This was a reflection both of its location, a few blocks from Stonewall, and of its historical mission, which had long been geared toward public health. (It was established in 1849 by an order of nuns called the Sisters of Charity, responding to a cholera epidemic.) For a decade or so, AIDS was good business as well as good public service. Then as now, providers were paid best for complex, procedure-intensive inpatient treatment, and until the development of protease inhibitors, AIDS patients logged a lot of time in the hospital. St. Vincent’s finances were also boosted by a respected and profitable psychiatric and substance-abuse program. By the late nineties, the hospital had built up a comfortable reserve estimated at $200 million.

Then, in 1998, with most of New York’s major hospitals in the process of agglomerating into multi-hospital systems, St. Vincent’s hired consultants at Ernst & Young to help it explore the possibility of expansion. It came to envision a Catholic health-care empire, bringing it together with six church-sponsored hospitals in Brooklyn, Queens, and Staten Island, as well numerous nursing homes and home-health-care agencies. Ernst & Young reported that the Catholic hospitals would lose $100 million annually by 2002 if they tried to go it alone, but would produce annual profits of $25 million to $30 million by uniting and taking advantage of a range of synergies. Purchasing and billing would be consolidated; the larger patient base would give the system clout to negotiate better reimbursement rates from insurers; and, most important, the outer-borough community hospitals would send their patients to the Village flagship for high-paying specialty care in areas like cancer and cardiology. “Merging was the magic bullet,” says one former St. Vincent’s executive. “The board got caught up in the romance of the idea, and there wasn’t any real due diligence.” As the date of the merger approached, the Times reported that the new hospital system was searching for “a chief executive whose résumé suggests a Jack Welch.”

Instead, St. Vincent’s hired a man named David Campbell, who arrived in New York after resigning from Detroit Medical Center, where he oversaw $100 million in losses. The consolidation experiment proved, in short order, to be a disaster. In 2000, the first full year of the merged system, St. Mary’s, in the Bedford-Stuyvesant neighborhood of Brooklyn, spent $27 million more on patient services than it collected; by 2005, its losses were up to $71 million. Other hospitals in the system, like St. Joseph’s in Flushing and Mary Immaculate in Jamaica, were similar money pits. “It’s not that they were badly run,” says a St. Vincent’s manager from that time. “It was just the basic problem of hospitals in poor neighborhoods.” In the past, the state would have stepped in to subsidize the cost of serving predominantly low-income patients, but in the era of free markets, much of the additional burden had to be absorbed by St. Vincent’s. At the same time, the successful conversion of AIDS into a chronic condition, treated on an outpatient basis, left huge numbers of empty beds in the Village.

In an effort to centralize control, the hospital’s board was pared down to five members—Campbell, a priest and a bishop from the Diocese of Brooklyn, and two nuns from the Sisters of Charity. But instead of efficiency, that team received a lesson in parochialism. The Brooklyn contingent was fiercely protective of the hospitals in the outer boroughs and was suspicious that the Manhattan facility was hoarding resources. The subject of closing St. Mary’s and St. Joseph’s, which were draining the system of cash at unsustainable rates, was considered off-limits, according to people familiar with the board’s deliberations. Resentment of Manhattan ran high at the community hospitals, whose physicians seemed to express their discontent by neglecting to funnel their patients to St. Vincent’s.

After St. Vincent’s lost $81 million in 2003, Campbell resigned, and the hospital hired a consulting firm from New Hampshire called Speltz & Weis. According to a legal action filed by St. Vincent’s in 2008, the firm’s principals, David Speltz and Timothy Weis, were its only employees. The complaint contends that the pair billed themselves as turnaround experts, having gotten a hospital in Syracuse back on its feet after bankruptcy. Speltz & Weis, the complaint says, immediately began firing members of inherited staff and replacing them with independent contractors, at a cost to the hospital approaching $2 million monthly.

The promised turnaround, however, failed to materialize. In 2004, Speltz & Weis’s first year on the job, the system lost $143 million. By the following year, the system had fallen $240 million behind in paying its bills, prompting some vendors to stop providing St. Vincent’s with supplies, creating disruptions in its operations and driving away patients.

On the Fourth of July, 2005, under intense pressure from its creditors, St. Vincent’s board voted to file for Chapter 11 bankruptcy protection, a move, the claim alleges, Speltz & Weis resisted. The following month, the board fired the consultants, suspecting that they had delayed bankruptcy proceedings in order to continue charging the hospital for their services, according to the complaint. All told, the complaint says, St. Vincent’s paid Speltz & Weis $30.8 million over their less than two-year tenure. Toward the end of that time, Speltz and Weis sold their consulting firm to a company they had retained as a contractor, for an additional $17 million. The complaint accuses Speltz & Weis of fraud, conflict of interest, breach of fiduciary duty, and numerous other misdeeds, and calls the pair’s motives “evil.” (The attorney representing Speltz & Weis did not respond to requests for an interview.)

The bankruptcy proceeding didn’t provide much help. When St. Vincent’s filed for Chapter 11 in 2005, it listed around $1.1 billion in liabilities. It emerged, 26 months and some $63 million in fees to lawyers and financial advisers later, with substantially the same obligation, shuffled into different piles. “We got no debt relief,” says a former top St. Vincent’s executive. “It was ridiculous.”

Early in the proceedings, St. Vincent’s listed some $972 million in assets, of which its real estate was valued at $341 million—a figure that many creditors believed vastly understated its actual value. Approaching the height of the real-estate boom, creditors presented St. Vincent’s with an unhappy choice: The hospital could find a way to make good on its debts, or be forced to close shop, selling off its million or so square feet of property in the West Village and divvying up the proceeds.

Foremost among those with a vested interest in getting paid back by St. Vincent’s was the state of New York, represented by its Dormitory Authority, which had backed hospitals throughout the Catholic system with $193 million in bonds. The state, in its dual role as the hospital’s creditor and regulator, refused to let St. Vincent’s off the hook for the money it was owed.

Out of cash but rich in real estate, St. Vincent’s emerged from bankruptcy by engineering a complex, interconnected series of deals, agreeing to sell its sprawling campus of eight buildings on the east side of Seventh Avenue to Rudin Management for $300 million. The hospital would then knock down its six-story building across Seventh Avenue and build a 329-foot-high facility designed by I.M. Pei’s architectural firm—the tallest building in the Village—at a cost of some $830 million, financed by a half-billion dollars in bonds and an aggressive fund-raising drive. The promise of a new, state-of-the-art hospital, it was hoped, would attract partnership interest from a wealthy academic center, like Mount Sinai or NYU, which would lend its prestige and resources to rebuilding St. Vincent’s.

That move also proved doomed. The prospect of a hulking high-rise, a new condominium complex, and years of closed streets and construction debris sparked vocal neighborhood opposition. Even as it waged a costly fight to win approval for its plans, the hospital remained mired in debt and saddled with expensive obligations left over from the bankruptcy, and its day-to-day operations were as unprofitable as ever. Even with Eli Manning as its new spokesman (at a cost of $600,000), St. Vincent’s couldn’t attract the newer, affluent, well-insured downtown residents it sought. In 2008, 86 percent of those who lived in the eleven Zip Codes around St. Vincent’s made their hospital stays elsewhere. “People became afraid to go to St. Vincent’s,” says one physician who spent twenty years there. “First, we got labeled the AIDS hospital, and that drove patients away. Second, we had a large indigent population, because we treated everyone the same whether they could pay or not. Some people weren’t comfortable being in the same room as those patients.”

In its first full year out of bankruptcy, St. Vincent’s lost $81 million. By the beginning of 2009, after only seventeen months back on its feet, says a former St. Vincent’s executive, “we were living off thin air.” St. Vincent’s new CEO, Henry Amoroso, aggressively shopped St. Vincent’s to hospitals throughout the region, but it was a hard sell. “The plant, the indebtedness—you would have needed to come into that place with a billion dollars,” says the CEO of a major hospital that was approached to rescue St. Vincent’s. “You take risks in this business, but calculated ones. You don’t want to put a knife through your heart.”

In January 2010, when industry insiders knew that St. Vincent’s was on the edge of collapse, the Continuum consortium came forward with an offer to take over the hospital and run it as an outpatient clinic. “I was trying to be a good citizen,” Continuum’s Stanley Brezenoff says. “Everybody else had passed on it—NYU, North Shore, New York–Presbyterian. It didn’t take much to see St. Vincent’s was not salvageable as an inpatient facility.” Continuum’s offer was met with a brief public outcry, and St. Vincent’s was not yet ready to admit defeat. Continuum backed away.

Finally, in March, with only a few weeks of emergency cash remaining in St. Vincent’s till, Mount Sinai showed up with what appeared to be an earnest eleventh-hour takeover offer, sending a team of its top business and medical people to St. Vincent’s to work out the details. St. Vincent’s staff and physicians, a number of whom met with the Sinai team, were convinced a deal was going forward. Within a week, though, Sinai pulled out. Appeals for an explanation to the state’s top hospital regulator, Health Commissioner Richard Daines, were unavailing. Members of St. Vincent’s brass were convinced, as one puts it, that “there was a clear indication from the body language of the state” that Daines disapproved of the takeover and was not ready to provide the transition funds that would have been needed to facilitate the deal. “We were frank all along in saying if your strategy depends on $50 million or $100 million in state funding, we can’t tell you that’s going to be available,” Daines says. One industry insider recalls conversations he had with Daines in 2009 in which the commissioner shared his belief that New York was overbedded, that Manhattanites had become too accustomed to living with hospitals in every neighborhood, and that St. Vincent’s was too debt-ridden ever to make itself a going concern. “Daines might well have been right,” this person says, “but the discussion was never held in public.” Indeed, no hearings were ever convened to consider whether, or how, St. Vincent’s should close. Today, Daines offers only the anodyne consolations of one who refused to intervene. “The Catholic health-care ethic—the commitment to underserved populations—that’s been such a wonderful thing,” he says. “I hope we don’t lose that with St. Vincent’s. I hope that as the nurses and physicians ooze out to other hospitals across the city, they’ll bring some of that Catholic ethic along with them.”

Spend your reserves, cut costs, declare bankruptcy. “That’s the life cycle of a New York hospital.”

It took less than a month to empty St. Vincent’s of its last patients. During that time, the state announced that it was providing Lenox Hill with $9.4 million in state funding to establish an “urgent care” center—essentially a round-the-clock clinic without the specialized staff and technical capacity of an ER—at what was once St. Vincent’s. That plan has not materialized. Across town at Bellevue, the city’s largest public hospital, ER traffic has increased by 2,000 patients per month since St. Vincent’s closed, in what Bellevue’s chief of emergency medicine termed “a significant disaster.”

Back in the Village, St. Vincent’s stands empty. Its windows are boarded with graffiti-scrawled plywood. The awning above the entrance to the ER has been defaced. Recently, a workman with a drill labored to remove a large brass ST. VINCENT’S HOSPITAL AND MEDICAL CENTER nameplate beside the hospital’s main entrance on West 12th Street, leaving behind a rectangle of faded brick.

The way forward seems perfectly, if brutally, clear. With private insurers under pressure to cover more patients yet not hike premiums, with federal and state governments facing record deficits, and in a local industry climate of free-market survivalism, many New York hospitals won’t be able to generate sufficient revenue to restore themselves to financial health. To be economically viable, then, the hospitals of the future will have to evolve into high-performance cost-cutting machines. Increasingly, they will no longer regard inpatient care as their main function and will strive to do as much of their business as possible in less expensive locations outside hospital walls. They will aim to provide more preventive care to keep patients out of hospitals and more follow-up care to keep them from returning. They will try to reduce unnecessary tests and treatments. They will seek to put an end to the expensive free agency of physicians by pressuring private doctors to become hospital employees, as concerned about cost management as care. They will search for ways to combat what many hospital executives describe as the tyranny of insurance companies.

Richard Daines contends that straitened times put healthy pressure on providers to tighten their operations. As in other industries, he believes, incentives should flow from performance. In his view, hospitals should be rewarded by the state for keeping infection rates down and patient-satisfaction scores up and punished for having patients return for further treatment after being discharged. If a hospital has a record of proven success in performing bariatric surgery, it might snag the Medicaid contract to set up a bariatric-surgery center; if its outcomes on breast-cancer surgery are middling, it might lose the ability to be reimbursed by the state for that service. To avoid becoming the next St. Vincent’s, hospitals ought to scour their books to ferret out inefficiencies, Daines says. “How many nursing hours are you using, how many housekeepers per square foot, how many food-service people per meal delivered? Hospitals need to drill down on those costs every day.”

A few hospitals are already headed in that direction. Montefiore has invested heavily in primary and preventive care across the Bronx; it employs most of its physicians; above all, it has taken steps to change the way it does business with insurance companies, establishing its own managed-care company that takes a percentage of insurers’ premiums in exchange for covering all the health-care needs of its customers, instead of billing them for individual services. With one of the least favorable payer mixes in the city—nearly 80 percent of its patients are on Medicaid or Medicare—Montefiore has nonetheless managed to eke out a 1 percent profit margin.

However efficient such new models may be, critics contend they’re bound to affect the quality of care. Many hospital managers say they have long ago trimmed the fat from their budgets and worry that further cost-cutting can only lead to rationing of services and jeopardize patients’ health. Less staff coupled with a greater resistance to ordering expensive tests and performing high-end procedures, they say, will threaten to transform hospitals into huge, one-size-fits-all health-care warehouses.

The megahospital model, critics say, will also leave whole communities, especially in low-income areas, without local care, and contribute to overcrowding at facilities throughout the city, most of which are already operating at or near full capacity. Queens is already down to 1.7 hospital beds for every 1,000 members of its population, about 40 percent less than the national average. Early in 2009, after the state allowed two members of St. Vincent’s former Catholic network—Mary Immaculate in Jamaica and St. John’s in Elmhurst—to go under, Jamaica Hospital, perched beside the Van Wyck Expressway in southeastern Queens and endowed with one of the poorest patient populations in New York (65 percent on Medicaid or uninsured), was left to take up the slack. Its ER, built to accommodate 60,000 patients annually, saw 131,000 cases last year. The chairman of emergency medicine at Jamaica, Geoffrey Doughlin, says Jamaica loses an average of $325 on every patient it sees in the ER and that the volume of patient traffic there has crippled the hospital’s ability to schedule nonemergency services with which it might recoup some of its losses. Jamaica has long been considered among the most critical, high-quality safety-net hospitals in New York, but it lost $13.5 million in 2009.

If Jamaica were to go the way of St. Vincent’s, other facilities would be forced to take on its patients and the accompanying financial burdens. The weakest of those hospitals could in turn be forced to close and shuttle their patients off to other vulnerable facilities, and so on in an accelerating downward spiral.

Daines, who speaks of the capacity of “the creative-destruction cycle of capitalism” to remake the hospital marketplace, says, “The state has an obligation to ensure health-care access to the communities of New York—but that’s very different from access to particular hospitals, and it doesn’t always mean the same traditional services in the same neighborhoods delivered the same ways. The idea that we help a community by preserving the current number and use of hospital beds is not necessarily true. And the public has to keep in mind that if you’re asking for more generous financial support of hospitals, well, you’re asking to pay for it.”

A few miles east of Jamaica and a world away, North Shore–LIJ has established one of the few bright spots in the otherwise forlorn world of New York hospitals. Its president and CEO, Michael Dowling, has won a reputation as one of the area’s most innovative and successful hospital executives by unapologetically championing a centrally controlled, relentlessly entrepreneurial, bottom-line-focused approach to his business—tradition be damned. When programs in his hospitals underperform, he closes them. When doctors complain about having to see patients in off-site clinics rather than in the hospital, he insists they do it whether they like it or not. “Some hospitals will hold on to tradition even when they’re dying,” Dowling says. “On their deathbed, they’ll still believe the way they did things was right.” Last year, North Shore–LIJ generated close to $5 billion in revenues. With a profit margin of 2 percent, it was the envy of the city’s hospitals. Aside from good management, the system enjoys another big advantage over most of its peers: Only 18 percent of its patients are on Medicaid. In New York hospitals, it helps to be smart, but it helps, above all, not to cater to the poor.

Last summer, not long after St. Vincent’s went under, Dowling gave his assessment of the meaning of its closure and of the prevailing philosophical and economic realities of health care in New York today. “An awful lot of people believe that government will always come in and protect you,” he said. “That there’s a safety net. That the government won’t let you fail. You’ve got to be kidding.”

St. Vincent’s Is the Lehman Brothers of Hospitals