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Report: West Penn system hospitals turn profit

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Thursday, May 17, 2012, 12:08 a.m.

West Penn Allegheny Health System's financial troubles are well-known, but its five individual hospitals are profitable, according to a report released Thursday.

The system's flagship institution, Allegheny General Hospital, North Side, posted a total profit margin of 11.63 percent, including investment gains, during the 2011 fiscal year, according to the Pennsylvania Health Care Cost Containment Council.

That was an improvement over the previous year and above average for hospitals in the Pittsburgh region.

Statewide, hospitals generally performed better in the year ended June 30, with average total profit margin of 6.93 percent, up from 5.26 percent. Profit margin is the percentage of profit over revenue.

The council, an independent agency that analyzes the state's health care system to improve quality and reduce costs, annually releases a report on hospital financial performance.

"I'm not surprised that bottom-line performance in the short term is looking good," said Jan Jennings, a health care consultant and CEO of American Healthcare Solutions, Downtown. "Hospital CEOs and their managers have been really working hard to cut costs and improve revenue."

Jennings and others warned that improved results may not last, as pressures from lower government reimbursements and higher levels of uncompensated care catch up with hospitals.

Statewide, charges for unpaid debt and free charity care, known as uncompensated care, totaled $990 million, up $99 million from 2010, according to the council.

"There's at least 7 percent of the bottom line of the American hospital going away," Jennings said.

In addition to positive margins at Allegheny General, each of the health system's four other hospitals -- West Penn in Bloomfield, Forbes Regional in Monroeville, Allegheny Valley in Natrona Heights and Canonsburg General -- had positive profit margins last year, the council's report shows.

The results stand in contrast to the system's overall performance. West Penn Allegheny showed an operating loss of $51.8 million during the same period, according to its financial statements. Adding in a $50 million grant from Highmark Inc. and investment gains, the system posted net income of $20.4 million.

West Penn Allegheny officials could not be reached for comment on what other parts of the system are causing steep operating losses. Highmark, the state's largest health insurer, is attempting to buy West Penn Allegheny in a $475 million deal that still requires approval from the state insurance department.

Robert Morris University health care economist Stephen Foreman said the system's administrative costs are bloated and that results are being weighed down by its $750 million in bond debt. West Penn Allegheny's interest payments on the debt is about $50 million a year, officials have said.

"Obviously their hospitals are making money," Foreman said. "That's something that jumps out at me -- just how good those hospitals look from an operating level."

Tax returns released to the public last week showed West Penn Allegheny's former CEO Christopher Olivia walked away from the system with $7.4 million last year, including severance payments. Two other top officials who left with Olivia in June were paid a combined $4.6 million.

The council's report looked at the 28 hospitals in Allegheny, Armstrong, Beaver, Butler, Fayette, Greene, Washington and Westmoreland counties and found the facilities last year had an average profit margin of 7.70 percent, up from 4.35 percent in 2010.

Of the 28 hospitals here, 24 made money last year, the report shows. Leading with the best total profit margins were Excela Health's Latrobe Hospital (17.49 percent), UPMC's Magee Womens Hospital (15.54 percent) and UPMC Passavant (13.68 percent).

Michael Busch, chief operating officer of Excela Health, said Latrobe's profit was boosted by investment gains. The hospital's operating margin (not including investment gains), a more modest 4.64 percent, is a better indicator of performance, he said.

Four hospitals in the region lost money last year: Advanced Surgical Hospital in Washington (down 33.61 percent), Uniontown Hospital (down 2.95 percent), Highlands Hospital in Connellsville (down 2.06 percent) and Heritage Valley Health System's Beaver Hospital (down 0.07 percent).

Advanced Surgical, a privately held for-profit specialty hospital, opened in April 2010 and the results for fiscal year 2011 were from the last nine months of 2010, CEO Lloyd Scarrow said.

"That was our startup year," Scarrow said. "Losses were expected."

He said 2011 was profitable, and this year "is expected to be much more successful."

Highlands Chief Financial Officer John Andursky said the hospital struggles with the region's second-highest level of patients with Medicaid, at 19.6 percent, which reimburses the hospital at a rate below cost. Revenue also was hurt by a decline in patient volume, he said.

Officials at Uniontown and Heritage Valley could not be reached for comment.

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