Rising medical costs squeeze independent hospitals

| Thursday, Feb. 23, 2012

Cuts to Medicare. Fewer patients. More charity care. Growing costs for technology and physician recruitment.

Add it all up, and Pittsburgh-area hospitals face increasing financial pressure that could in coming years force mergers, buyouts by larger systems or closings, experts say.

"You're going to see enormous financial pain on the part of independent hospitals in the region," predicted Jan Jennings, a health care consultant and president of American Healthcare Solutions, Downtown. "They're either going to get into a (larger) system or they're going to close."

While the growth of UPMC and the struggles of West Penn Allegheny Health System have been well-reported, community hospitals are somewhere in between. Many are running on razor-thin margins, eking out small profits on their operations. Several reported losses on operations last year.

Five area hospitals or small health systems lost money on operations in the fiscal year that ended June 30: Excela Health, Heritage Valley Health System, Jefferson Regional Medical Center, Butler Health System and Indiana Regional Medical Center.

Five others -- St. Clair Hospital, The Washington Hospital, Jameson Health System, Sharon Regional Medical Center and Monongahela Valley Hospital -- made money on operations over the same period. But operating margins at Monongahela, Sharon Regional and Jameson were low, coming in between 0.2 percent and 1.5 percent. Washington and St. Clair had operating margins of 4.0 percent and 6.7 percent, respectively.

Uniontown Hospital, whose credit rating has been downgraded twice since 2009 by Moody's Investors Service, said last week it's in discussions with UPMC on expanding its clinical relationship with the region's dominant health system to the area of physician management.

The biggest pressure comes from cuts in government reimbursements through Medicare and Medicaid, said Jennings, a former CEO of Jefferson Regional in Jefferson Hills. The programs for the retired and poor lost a combined 11 percent last year and face trims of 8 percent to 12 percent over the next five years, he said.

"Allegheny County is the second oldest county in the U.S. With that kind of loss in cash income ... there's going to be an enormous amount of pain," he said. Local hospitals aren't "on the precipice at the moment. But over the next five years, if they continue to loss money, they're going to be in deep trouble."

Other factors are fewer hospital admissions, driven by a shift to less costly outpatient treatments and people putting off procedures for financial reasons, and increases in charity care of people without insurance, according to the Hospital Council of Western Pennsylvania in Warrendale.

Hospital admissions were down 1.5 percent, and inpatient surgical operations fell 5.9 percent in the July-September quarter, according to a recent council survey of 25 hospitals in Southwestern Pennsylvania. Uncompensated care, meanwhile, rose 5.9 percent in that period, the survey found.

The troubling trends have been occurring over several years, Hospital Council President A.J. Harper said, but he isn't ringing the alarm. In recent months, he's been surprised by the number of hospitals in other parts of the country that have announced mergers or acquisition deals. But Western Pennsylvania has experience scraping by.

"We've lived on relatively thin margins," he said. "No region is exempt, but I don't think there's a knee jerk reaction in Western Pennsylvania because they're already pretty lean."

In a report last month on the nonprofit hospital sector, Standard & Poor's warned that many hospitals cut expenses to weather the recession and have little room to absorb lower reimbursements.

"We expect system-to-system mergers to increase, and we also believe many standalone providers will need to overcome traditional community control concerns and seek larger partners to prepare for challenges," S&P analysts said.

Local hospital executives remain steadfast in their independence and said their growth plans will succeed.

Excela Health, the Greensburg-based three-hospital system, reported an $11.8 million loss from operations for the 12 months ended June 30. But that included a one-time charge of $13 million related to closing its hospital in Jeannette in early 2011, Chief Operating Officer Michael Busch said. Not counting the charge, Busch said, the system finished the year with an operating margin of 0.3 percent.

But that's not acceptable, Busch said: The hospital wants an operating margin of 2 percent to 3 percent.

To combat declining hospital admissions and the migration of patients to UPMC for procedures, Excela is heavily recruiting specialty physicians, increasing its outpatient services and working to become more efficient, Busch said.

"We think if we really focus on the patient and doing the right thing, our margins will improve," he said.

Inpatient revenue is accounting for less of a health system's total revenue. And it takes many more outpatient procedures to make up for the lost revenue of one less inpatient procedure, said Thomas Aubel, vice president of data management for the Hospital Council.

"The old standby is it takes 30 outpatients to equal an inpatient," he said.

Heritage Valley Health System, the two-hospital system in Beaver, lost $11.5 million on operations for the year ended June 30. The result was exacerbated by a one-time charge of $9 million related to an early retirement program the system instituted early last year to cut costs, Chief Financial Officer Bryan Randall said.

In the second half of last year, it turned a $4.9 million profit on operations, or a margin of 2.1 percent, Randall said. Heritage, too, is expanding outpatient facilities to capture more patients and grow revenue.

"Health care has become much more of a customer-service-oriented business than it was," CEO Norm Mitry said.

The system will open a 30,000-square-foot medical services center in Chippewa next month, and this week it opened an urgent care facility in Moon, its sixth.

"People want convenience," Mitry said.

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