Wall Street’s rebound hasn’t just been a blessing to Connecticut’s financial institutions. It’s also providing a boost to Connecticut hospitals, which continued to show signs of recovery in 2010, as investment income — a key source of their revenue — bounced back strongly.
That boost, along with widespread cost-cutting initiatives, caused fewer Connecticut hospitals to lose money last year and allowed the industry as a whole to grow its surplus by 59 percent, a Hartford Business Journal analysis of industry financial data has found.
But, hospital officials warn, the improved results don’t necessarily mean brighter days are ahead.
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Hospital performance chart
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Historically, Connecticut hospitals have barely broken even financially and their margins continue to be thin. While Connecticut hospitals saw their total margin increase, they actually experienced a slight drop in their operating performance. The difference is attributable, in part, to improved investment returns.
With state budget cuts expected to drain about $30 million in hospital funding, continued lax reimbursements from Medicare and Medicaid, and uncertainty surrounding health care reform, the industry’s uneven financial performance will likely continue.
“Even with the dramatic improvement, it’s only bringing us up to the bare minimum of where we need to be,” said Stephen Frayne, senior vice president of health policy for the Connecticut Hospital Association. “We are just coming out of the worst recession anyone has seen, but there are still many challenges out there.”
In fiscal 2010, more than three quarters of the state’s 30 acute care hospitals achieved a positive total margin, compared to fewer than half two years ago. The statewide total margin reached about 4 percent, up from 2.6 percent a year earlier, the HBJ analysis found.
Only five hospitals were in the red last year, compared to seven a year earlier. The money losers included Griffin, Milford, St. Francis, Windham, and Johnson Memorial hospitals.
During normal times, Connecticut hospitals will typically see about a $130 million to $140 million return on their investments. But in 2008, as the markets began to swoon, the state’s hospitals actually saw a negative return, which wiped out their operating income for the year.
The stock market rebound has reversed the trend, and non-operating income for Connecticut hospitals grew to about $130 million in 2010. And total hospital net assets increased to about $4 billion from $3.6 billion in 2009.
Industry-wide cost cutting initiatives have also helped, as hospitals have aggressively reduced expenses.
At Middlesex Hospital, for example, the senior management team has been working to control salary and benefit costs, which make up about 65 percent of expenses, by reducing overtime hours and raises and cutting back on health care benefits, said Vincent G. Capece, Jr., the hospital’s president and chief executive officer.
The hospital also has found ways to reduce supply and drug costs.
Those measures, along with a boost in investment income, allowed the hospital to have its best year ever financially in 2010, despite seeing a reduction in in-patient volume. The hospital’s operating margin exceeded 6 percent, making it the best performing hospital in Connecticut.
“We are always managing expenses and looking for ways to streamline care,” Capece said.
But he warned that cost cutting initiatives can only go so far, and the financial challenges that continue to plague the industry remain a deep concern.
Capece said chronic underfunding from government payers, along with pressures to adapt to health care reform and continue to invest in new technology are factors placing significant pressure on every hospital’s bottom lines.
In fact, the average statewide operating margin in 2010, which excludes investment income, actually dipped slightly to about 2.55 percent from 2.7 percent a year earlier.
Adding to the concerns, industry officials said, is that hospitals will likely see an average 3 percent reduction in Medicare reimbursements. And the recently passed state budget cuts an estimated $30 million in funding for the industry.
“There is only so much you can do on the expense side,” Capece said. “We must grow the top line to survive long term.”
Manchester and Rockville hospitals, which operate as part of the Eastern Connecticut Health Network, posted operating margins in 2010 of about 3.7 percent and 5 percent respectively.
Michael Veillette, ECHN’s senior vice president of finance and information services, said the hospitals were able to recover most of the investment income they lost during the Great Recession. Greater patient volume in the emergency department as well as outpatient surgery, physical therapy, and other service lines also helped, as did cost control initiatives like not filling certain staff vacancies.
But Veillette said he remains concerned. Despite the individual hospitals performing relatively well, the entire ECHN system had a much smaller margin of about 2.3 percent.
Veillette said ECHN has seen its operating margin slip for three consecutive years. Tougher days may be ahead. The health care provider expects its annual pension obligation to rise from about $3 million to $11 million in the coming years.
“As a system, we’ve seen ourselves become more finally challenged,” Veillette said.
Hartford Healthcare saw improved results for two of its hospitals. After reporting a loss in 2009, Hartford Hospital saw a positive operating margin of 1.32 percent, while MidState Medical Center in Meriden saw its operating margin rise to 5.24 percent from 3.2 percent.
Medicare-dependant Windham Hospital, which reported a loss in 2009, saw its operating margin fall to -2.16 percent
Thomas Marchozzi, Hartford Healthcare’s executive vice president and chief financial officer, said the system’s improved results were driven by stronger revenue collections and the continued efforts to streamline and add new services.
Hartford Hospital officials said they saw significant growth in several service areas including in neurology and its joint replacement program. During the year, Hartford Healthcare also expanded into Enfield and saw a 100 percent growth in its 24-hour care transfer center in Hartford Hospital.
The organization’s H3W program, which is a system-wide lean manufacturing initiative, is also paying dividends, said Jeffrey Flaks, the executive vice president and chief operating officer of Hartford Healthcare. The project, which was started a few years back, has allowed the organization to implement 550 measures that improve efficiency by driving down costs or boosting revenues.
John Dempsey Hospital, which has experienced significant losses over the years, reported about a $10.2 million loss in fiscal 2010, but had a positive total margin, thanks in part to a $19 million deficit appropriation from the state that was awarded in 2009, but recognized in 2010.
John Biancamano, the health center’s chief financial officer, said the hospital’s 2010 performance was impacted by a reduction in patient volume, as well as continued losses from money losing services including psychiatry and its neonatal intensive care unit.
“Because we have such a substantial part of our revenue coming from those areas, it will result in a loss to us,” Biancamano said.
But Biancamano said 2011 looks better and he expects the hospital’s operating loss to shrink by about $6 million.
Besides an increase in patient volume, he said, the hospital has been able to renegotiate its contracts with several insurers, which is providing higher reimbursement rates.
