MedCath changes, adapts for survival

When MedCath Corp. first sold stock in itself 14 years ago, its business plan of operating specialty heart hospitals was revolutionary and controversial.

Now the Charlotte-based company, which reported lackluster operating profits this week, plans to add weight-loss surgery and a line-up of other profitable surgical services to its model, said Jeff Hinton, the company's chief financial officer. It's building larger hospitals with more than 100 beds to make room for new services and more patients.

But to succeed, it first has to survive the changing industry. The singularity of MedCath's product – what had made it special – also made it vulnerable to changes in the cardiac-care market, Hinton said. Some of those changes came this year to rob the bottom line.

MedCath's third-quarter income from day-to-day business was down 37 percent. The company reported net income from those operations of $5.3 million, or 27 cents per share, compared with $8.4 million, or 40 cents a share, for the same quarter last year.

The company, however, reported a one-time windfall from the sale of a hospital, pushing the total third-quarter earnings up to $11.8 million, or 60 cents a share. That compares to $9.3 million or 44 cents a share the same quarter last year.

MedCath's main money-makers are stents, the devices inserted to open up clogged arteries. But a study published earlier this year called into question the effectiveness of drug-coated stents, a profitable treatment for the company. The insurance industry also started paying less for certain heart procedures it deemed not serious enough for in-hospital stays, another money-maker for the company. “We were taking it on the chin,” Hinton said.

Over the year, drug-coated stents have been improved and made a comeback, said Edwin French, the chief executive officer. And Hinton said the insurance industry had narrowed its list of procedures deemed to be outpatient and less expensive. Even so, there's a continued migration of procedures to outpatient status, French said. That lost money is being offset by the new increased use of drug-coated stents, he said.

MedCath began as a private company in 1988 that ran heart catheterization labs. In 1994, it sold stock to raise money for its first specialty heart hospital. The idea was controversial because physicians owned them, a potential conflict of interest with the tenets of patient care. Large community hospitals also complained, saying the hospitals cherry picked the most profitable and safest patients, leaving the most high-mortality patients for them.

Congress placed a moratorium on constructing new specialty hospitals in 2003, and it lasted until 2005. MedCath and other companies lobbied hard against a new moratorium and Congress let it expire. A federal law establishing rules on specialty hospitals and who can own them is expected soon.