As the debate over hospital funding and taxes rages on at the State Capitol, several healthcare CFOs are going on the offensive by trying to paint a clearer picture of the financial shape of Connecticut’s largest healthcare systems, which have been singled out by the Malloy Administration as a ripe target for budget cuts.
Recent data showing that Connecticut’s 29 acute care providers raked in $469 million in operating profits in 2014, and posted a collective 4.42 percent operating margin — one of their strongest showings in years — is misleading, CFOs say, because it only reflects results from individual hospitals.
But hospitals, executives say, are part of larger healthcare networks that have experienced much slimmer margins in recent years. In fact, the state’s 21 health systems, each of which owns a variety of institutions ranging from hospitals and physician practices to nursing homes and home health agencies, actually posted a -0.23 percent operating margin in fiscal 2014, according to financial data collected by the Office of Health Care Access (OHCA).
Nearly a third of the state’s healthcare networks experienced operating losses last fiscal year, OHCA data shows.
The conflicting numbers, CFOs say, reflect the complex nature of hospital finances and the limited financial flexibility of some provider networks. It also adds to the growing debate over how to assess the health of local hospital systems, and how much they should contribute to help the state close its billion-dollar deficits projected for the next two fiscal years.
The Malloy Administration, which has argued healthcare providers have fat to trim from their budgets, has proposed funding cuts and higher taxes that could cost hospitals more than $750 million in annual revenue, according to the Connecticut Hospital Association.
Last week, the finance committee proposed an alternative budget that would raise $321 million in new hospital taxes.
“To talk about the performance of hospitals and point to one part of our total income statement is not a true indicator of how well Eastern Connecticut Health Network is doing or any other healthcare system for that matter,” said Michael Veillette, CFO of ECHN, which owns Manchester Memorial and Rockville General hospitals.
Detailing discrepancies
Health networks serve as parent companies to hospitals, and they’ve been growing significantly in recent years as a major consolidation wave sweeps through the state. Besides hospitals, many health systems have aggressively added physician groups and other services including nursing homes, home health agencies, and behavioral health practices.
Veillette said the true health of the industry can only be judged by looking at the networks as a whole. ECHN’s two hospitals, for example, had relatively strong showings last fiscal year: Manchester Memorial and Rockville General had operating margins of 2.26 percent and 3.7 percent, respectively.
But ECHN, which also owns a nursing home, physician groups, a real estate company, and a visiting nurse association, barely made it into the black, squeaking out a 0.67 percent operating margin, OHCA data shows. A healthy margin is considered to be between 3 percent and 5 percent.
In nearly all cases, Connecticut’s individual hospitals outperformed their parent company.
St. Francis Hospital and Medical Center, for example, posted a 2.11 percent operating margin in fiscal 2014, but its parent, St. Francis Care, had only a 1.43 percent margin. Hartford Hospital recorded a 3.37 percent operating margin last year; its parent, Hartford Healthcare, had a 2.06 percent margin, OHCA data shows.
Explaining the minutiae of hospital finances isn’t something CFOs do often, but it’s part of the industry’s strategy to lobby lawmakers against approving the deep funding cuts and tax increases proposed under Gov. Dannel P. Malloy’s budget.
Malloy’s budget office, however, has been steadfast in its approach to hospital funding.
“The fact is that nonprofit hospitals earned more than half a billion dollars in profit last year,” said Gian-Carl Casa, undersecretary for legislative affairs of the Office of Policy and Management. “Payments from the state to hospitals under the state Medicaid program are expected to be about $1.8 billion this year, compared to a decade ago when they were $785 million. That’s more than double. Hospital net assets totaled $5.6 billion in FY 2013, up around 40 percent since FY 2009. It may be time for them to think about things built into their cost structures.”
Costly doc groups
The single biggest driver of why individual hospitals typically outperform their parent networks is the investment in physician practices, CFOs say. Hospital systems have been aggressively acquiring doctor groups in recent years as small independent practices find it financially more difficult to survive on their own.
The trend has also been spurred by changes in the way health care is delivered and paid for, but buying practices can often be a money losing venture for hospital networks, at least in the short term, CFOs say.
According to the New England Journal of Medicine, hospitals lose an average of $150,000 to $250,000 per year over the first three years of employing a physician, largely because of the added salary and benefits costs.
St. Francis Medical Group, for example, which employs 200 providers including advanced practice nurses, physician assistants, and specialists, recorded a $22.7 million operating loss in fiscal 2014.
ECHN’s Eastern CT Medical Professionals, which employs about 30 physicians, lost $7 million last year. Lawrence & Memorial Corp., parent to New London’s Lawrence & Memorial Hospital, saw its doctors’ group post a $23.1 million operating loss in fiscal 2014, OHCA data shows.
Still, the red ink hasn’t stopped hospitals from aggressively pursuing physicians. That’s because the long-term economics often make financial sense. The main attraction is building up local market share and a strong referral base.
As hospitals employ physicians, those doctors will often refer their patients to other doctors or specialists within the network they work for, generating a steady stream of business for the hospital system, CFOs say.
Networks also typically force physician practices to cede some of their lucrative ancillary services, like imaging and lab testing, which get transferred to the hospitals, said David Bittner, CFO of St. Francis Care.
“The hospital benefits from those ancillary services, so it’s a net positive for the system,” Bittner said.
Healthcare reform is also pressuring hospitals to form accountable care organizations that increasingly hold providers financially responsible for better coordinating and managing the health of their patients, rather than simply providing sick care on a fee-for-service basis. That requires purchasing doctors to build an integrated system and to ensure physicians remain in the community so patients have access to the care they need, Bittner said.
Veillette said if ECHN didn’t make the decision to purchase physician practices over the past decade, “We wouldn’t have all the revenue we currently report on our hospital financial statements, thus that’s why you can’t look at just the performance of the [physician groups] or the hospitals.
“We made the decision many years ago…to preserve local access for our community and also to ensure our future financial viability,” Veillette said. “Without these physicians in the communities we serve, we’d see a potential decline in our hospital services, and so although these practices on a standalone basis are generally losing money, we’d be losing even more money without them in the community.”
