New President, Reduced Debt Breathe Life Into Summit Health

Summit Health Ltd., a Burbank-based hospital and nursing home chain that was on the critical list a year ago, seems to be on the road to recovery.

Last week Summit reported that its earnings in the first quarter that ended Sept. 30 soared 56% to $1.6 million from $1.1 million a year ago, while revenues dipped slightly to $92.8 million from $93.3 million.

The reasons for the improvement aren’t dramatic. “In the turnaround of a health care company like Summit, you never hit a home run, you hit a lot of singles,” said Donald J. Amaral, Summit’s president.

Under Amaral’s guidance, the improvement also showed up in Summit’s 1990 fiscal year, which ended June 30, when the company earned $2.4 million on revenues of $375 million, after losing a combined $14.9 million in the two previous fiscal years.

After a lengthy search, Amaral was hired a year ago to help resuscitate the company. Amaral was chief executive of Mediplex, a health care subsidiary of Avon Products, and before that he worked for National Medical Enterprises, a Los Angeles health care company.

Summit had essentially created its own problems, taking on a huge debt load--including $86.3 million in junk bonds--to finance a slew of acquisitions of hospitals and nursing homes in the mid-1980s. Then Congress changed the rules of reimbursement in Medicare, the federal health insurance program, severely crimping profits of most hospitals and nursing homes.

Once hospitals could count on Medicare paying any bill they submitted. But in 1983, the program began efforts to slash payments by establishing fixed fees for treatment of illnesses to encourage physicians and medical institutions to keep costs low. If they can provide care for less than the government fee, they keep the difference; if their costs exceed the fee, they lose money. The change was particularly painful to a debt-laden company such as Summit, with plenty of interest to pay.

So one of the company’s big efforts this year was to pay down its debt. Summit still has a sizeable long-term debt of $111 million, compared to a net worth of $74 million as of Sept. 30. But Summit has begun to reduce its borrowings under a bank credit agreement to about $30 million today compared to $45 million a year ago, allowing the company to lower its interest payments by about $480,000 in the most recent quarter.

Some of the cash to pay that debt down came from tightening up Summit’s bill collecting. According to Summit’s chief financial officer, Randolph H. Speer, the company also worked to persuade insurance companies and creditors to pay medical bills more promptly.

Meanwhile, Summit’s revenues from outpatient services--those provided to people not spending the night at the hospital--grew 31% because the company spent more to advertise those services and make them more convenient for patients. Summit’s hospitals started scheduling some outpatient surgical procedures for Thursday and Friday nights, allowing patients to recover at home over the weekend and return to work on Monday.

Summit also has made an effort to persuade doctors to refer patients to its hospitals who were suffering from severe illnesses, because such patients count for more revenue every day they are in the hospital.

Despite expectations a year ago that one of Summit’s main efforts would be to prune some of its operations, Amaral said there’s been little asset selling, and it hasn’t changed matters much. Summit did sell its 60% interest in eight Saudi Arabian hospitals in April for a $1-million loss. Amaral said the hospitals weren’t losing money, they were just too far to be managed properly.

He said the company did not sell off its nursing home operations because Summit was pleased with the nursing homes’ results in the last year, after making some changes in how they are operated.

Although the Internal Revenue Service is auditing Summit’s 1985 and 1986 tax returns, Amaral said the company has put aside enough money to cover any additional payments the company might have to make.