Hospi­tal mar­gins slump due to squeeze from vol­ume, rates, in­vest­ments

Modern Healthcare - - NEWS - By Beth Kutscher

In re­cent years, Cone Health has ex­pe­ri­enced solid growth in pa­tient ser­vice rev­enue, gen­er­at­ing a 10.3% jump to $1.1 bil­lion in fis­cal 2013 over the pre­vi­ous year.

The Greens­boro, N.C.-based sys­tem re­ceived a boost from new op­er­a­tions and added pa­tient vol­ume through its af­fil­i­a­tion with Ala­mance Re­gional Med­i­cal Cen­ter in Burling­ton, N.C., an al­liance strat­egy be­ing widely pur­sued across the coun­try. It also ne­go­ti­ated higher rates with its in­sur­ers.

Yet de­spite the rev­enue in­crease, it fin­ished the year with an op­er­at­ing deficit of $44.1 mil­lion as ris­ing salary, ben­e­fit and re­tire­ment costs con­trib­uted to an ex­plo­sive 18.3% hike in ex­penses. Its higher vol­ume trans­lated into higher sup­ply costs. And it in­curred new ex­penses from in­stalling an elec­tronic health-record sys­tem, open­ing a new tower and in­te­grat­ing Ala­mance.

Only in­vest­ment in­come and the in­her­ent con­tri­bu­tion from the Ala­mance af­fil­i­a­tion al­lowed the sys­tem to fin­ish in the black. “It’s been a pe­riod of in­vest­ment; it’s been a pe­riod of prepa­ra­tion,” said Terry Akin, pres­i­dent and chief op­er­at­ing of­fi­cer for Cone Health. “It’s also been a time of fi­nan­cial chal­lenges. Last year in par­tic­u­lar was the per­fect storm for us.”

A Mod­ern Health­care anal­y­sis of earn­ings re­ports for about 200 hos­pi­tals and health sys­tems, both not-for­profit and in­vestor-owned, found that hospi­tal mar­gins nar­rowed sig­nif­i­cantly last year de­spite an im­prov­ing econ­omy.

De­spite a buoy­ant stock mar­ket streak by some pub­licly traded chains, health­care providers as a group con­tinue to op­er­ate with slim and shrink­ing mar­gins. Over­all, a smaller per­cent­age of health­care providers saw pos­i­tive op­er­at­ing mar­gins last year com­pared with the pre­vi­ous two years.

Mod­ern Health­care’s anal­y­sis found that the aver­age op­er­at­ing mar­gin in 2013 was 3.1%, down from 3.6% in 2012 based on data avail­able for 179 health sys­tems, which in­cluded acute-care, post-acute care, re­ha­bil­i­ta­tion as well as spe­cialty hospi­tal groups and some stand­alone hos­pi­tals. A to­tal of 61.3% of or­ga­ni­za­tions in Mod­ern Health­care’s anal­y­sis saw their op­er­at­ing mar­gins de­te­ri­o­rate over the pre­vi­ous year.

Health­care ex­ec­u­tives ac­knowl­edge that the busi­ness land­scape has been chal­leng­ing. But some be­lieve a turn­around could hap­pen as soon as this year as some cost pres­sures ease and they be­gin to test the busi­ness case for bun­dled pay­ments and ac­count­able care or­ga­ni­za­tions.

“I’m very ex­cited about the trends that we’re see­ing in 2014,” said Todd Hofheins, se­nior vice pres­i­dent and chief fi­nan­cial of­fi­cer at Renton, Wash.-based Prov­i­dence Health & Ser­vices. “We’re start­ing to see the value of shared ser­vices. We fin­ished our Epic (EHR) im­ple­men­ta­tion this year. We’re also see­ing the ben­e­fit of Med­i­caid ex­pan­sion.”

Is the worst over yet?

But an­a­lysts re­main skep­ti­cal that the worst is over. Vol­umes are down as much as 7%. All three credit-rat­ing agencies have a neg­a­tive out­look on the not-for-profit health­care sec­tor. Moody’s In­vestors Ser­vice, for in­stance, says it has been down­grad­ing twice as many not-for-profit providers as it has up­graded. Many of the up­grades are due to ac­qui­si­tions rather than or­ganic growth.

“Rat­ings are re­act­ing to the mar­gin pres­sure,” said Martin Ar­rick, man­ag­ing di­rec­tor at Stan­dard & Poor’s. “There is a lot of op­er­at­ing pres­sure on hos­pi­tals and our ex­pec­ta­tion is that

it’s go­ing to con­tinue.” Rev­enue from pa­tient care has been squeezed as Medi­care and commercial in­sur­ers at­tempt to hold down spend­ing and re­duce uti­liza­tion. The ex­plo­sion of high­d­e­ductible health plans has led more pa­tients to de­lay care, cre­at­ing staffing and op­er­a­tional chal­lenges.

At the same time, costs are ris­ing as providers in­vest in the new tech­nol­ogy and care- co­or­di­na­tion staff needed to par­tic­i­pate in health­care re­form’s new pay­ment mod­els.

Things are pick­ing up at Cone

At Cone Health, Akin ac­knowl­edged that a drop in uti­liza­tion “out­stripped our abil­ity to cut costs.” But things are pick­ing up. The first six months of fis­cal 2014 are al­ready ahead of budget. The sys­tem made “ma­jor im­prove­ments” in its rev­enue-cy­cle func­tions and in­sti­tuted more flex­i­ble staffing ar­range­ments to match swings in vol­ume. “I think the next few years will be very, very chal­leng­ing,” Akin said.

Cone isn’t alone. Only 84.4% of provider or­ga­ni­za­tions op­er­ated in the black last year, down sharply from the 89.2% that had pos­i­tive re­sults in 2012 and even be­low the 86.9% of providers that posted pos­i­tive re­sults in 2011. Data were avail­able for 222 or­ga­ni­za­tions for fis­cal 2012 and 206 for fis­cal 2011.

The brief im­prove­ment in 2012 came from cost-cut­ting, said S&P’s Ar­rick. The strat­egy worked—but only tem­po­rar­ily. “Hos­pi­tals are run­ning out of room to cut costs” even as the de­cline in pa­tient vol­ume ac­cel­er­ates, he said. “It’s all kind of catch­ing up to us.”

Ma­jor in­vest­ments to get ready for new pay­ment and de­liv­ery mod­els still aren’t gen­er­at­ing a mean­ing­ful re­turn. Ar­rick said hospi­tal ex­ec­u­tives es­ti­mate less than 5% of rev­enue comes from pop­u­la­tion health man­age­ment.

“It’s go­ing to be re­ally slow and there are a lot of people who ba­si­cally see them­selves op­er­at­ing in a fee-forser­vice en­vi­ron­ment,” he said.

Prov­i­dence was among the sys­tems with shrink­ing mar­gins last year. The falloff in its fi­nan­cial per­for­mance this month led to a rat­ings down­grade from both Moody’s and S&P.

To pre­pare for pop­u­la­tion health man­age­ment, the five-state sys­tem im­ple­mented a new EHR sys­tem across all its hos­pi­tals at a cost of $750 mil­lion. It has also in­vested heav­ily over the past three years to build a shared-ser­vices di­vi­sion—a cen­tral­ized unit that han­dles back­of­fice func­tions such as rev­enue-cy­cle man­age­ment and ac­counts payable.

While that move was pro­jected to save as much as $400 mil­lion over the next three to four years, Prov­i­dence is just be­gin­ning to re­al­ize those gains. It has yet to off­set the sharp de­cline in in­pa­tient vol­umes, which, as at most sys­tems, have been re­placed by less lu­cra­tive ob­ser­va­tion stays, of­fice vis­its and out­pa­tient ser­vices.

“It’s re­ally get­ting paid for a new com­pe­tency, which is get­ting paid for keep­ing people healthy,” Hofheins said. “Un­for­tu­nately, you can’t just get there by cut­ting costs— you have to get there by in­vest­ment.”

As rev­enue from pa­tient care de­clines, hos­pi­tals are in­creas­ingly mak­ing up the short­fall with non-op­er­at­ing rev­enue, said Paula Song, an as­so­ciate pro­fes­sor of health pol­icy and man­age­ment at the Univer­sity of North Carolina’s Gillings School of Global Pub­lic Health.

In a bull mar­ket, rev­enue from in­vest­ment portfolios, en­dow­ments and do­na­tions can pro­vide a boost to the bot­tom line.

How­ever, the sys­tems that are most likely to be strug­gling fi­nan­cially are also the ones with the small­est cash cush­ions and there­fore less cash to in­vest. They missed out on the op­por­tu­ni­ties in last year’s bull mar­ket, Song said.

The groups with the strong­est op­er­at­ing mar­gins last year in­cluded:

United Sur­gi­cal Part­ners In­ter­na­tional, which op­er­ates am­bu­la­tory sur­gi­cal cen­ters as well as hos­pi­tals.

HealthSouth Corp., which op­er­ates 103 re­ha­bil­i­ta­tion hos­pi­tals in 28 states, ac­cord­ing to Se­cu­ri­ties and Ex­change Com­mis­sion fil­ings.

Cook Chil­dren’s Health Care Sys­tem, a two-hospi­tal sys­tem based in Fort Worth, Texas.

Uni­ver­sal Health Ser­vices, a pub­licly traded sys­tem based in King of Prus­sia, Pa., which op­er­ates 24 acute­care hos­pi­tals and 194 be­hav­ioral health cen­ters in 37 states, Wash­ing­ton, D.C., Puerto Rico and the U.S. Vir­gin Is­lands, ac­cord­ing to SEC fil­ings.

Buck­ing the trend

Some acute-care hos­pi­tals are buck­ing the trend, how­ever. NorthBay Health­care in Fair­field, Calif., which op­er­ates 157-bed NorthBay Med­i­cal Cen­ter, has im­proved its op­er­at­ing mar­gin from neg­a­tive 2.1% in 2011 to 0.2% in 2012 and 6.3% last year.

Its se­cret? Four years ear­lier, NorthBay, which is about half­way be­tween San Fran­cisco and Sacra­mento, be­gan fo­cus­ing on keep­ing its pa­tients in Solano County for spe­cialty ser­vices such as car­dio­vas­cu­lar surgery.

It also has re­ceived des­ig­na­tion as a Level 3 trauma cen­ter and is seek­ing a Level 2 des­ig­na­tion.

NorthBay doesn’t need a larger part­ner to sur­vive, CEO Gary Pas­sama said.

“Be­ing smaller, we have much more flex­i­bil­ity,” he added. “Maybe be­ing too big is not as good as people think.”

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