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Healthy now, midstate hospitals approach turning point

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In the fiscal snapshots that are hospital-only balance sheets, most local providers look pretty healthy. At last report, all but two had operating margins above 4 percent, and many had even higher total margins.

Those percentages have been improving over the past several years as health care reform and market pressures pushed hospitals to become more efficient, according to Martin Ciccocioppo, vice president of research at The Hospital & Healthsystem Association of Pennsylvania. In 2011, 20 percent of Pennsylvania hospitals had a negative total margin for the year, compared with 45 percent in 2009.

Ciccocioppo doesn't expect the rise to continue.

"We've probably topped out in terms of operating and total margins and are likely facing an inflection point," Ciccocioppo said. "There's downward pressure on payments, and there's little that hospitals can do to reduce expenses."

Dennis Roemer, executive vice president and chief financial officer of Lancaster General Health, said the potential negative financial impact of health reform there has been estimated at $250 million over 10 years.

"Those margins are really going to be under constant pressure," Roemer said. "It's about taking out excess costs wherever and however it can be done, without sacrificing quality or patient experience."

LG Health is expecting state and federal programs to tighten purse strings, Roemer said, but the health system's leaders are hoping and trusting that the reductions focus on eliminating unnecessary procedures or inappropriate payments rather than cutting payments across the board.

Roemer also noted that understanding the financial performance of hospitals and health systems by looking at publicly available data is "really hard" because of their organizational complexity. Even ratings agencies, he said, have to ask management teams where components such as electronic health record incentive payments show up in an organization's accounting. And physician practices — in which health systems have been investing much money lately — aren't necessarily organizationally classed as part of hospitals, although system integration with physicians looms large in hospitals' future success.

That's the case at PinnacleHealth System, where spokeswoman Kelly McCall said the Pennsylvania Health Care Cost Containment Council data includes some outpatient facilities that are part of hospital operations but do not include its physician practice group.

PinnacleHealth operates the facilities at Harrisburg Hospital and Community General Osteopathic Hospital as one hospital, McCall said, and the 2011 figures do not include costs for the West Shore Hospital that PinnacleHealth is constructing.

Penn State Milton S. Hershey Medical Center, which posted the highest operating margin among the local nonprofit hospitals in the PHC4 report, is another facility whose figures did not include the system's medical group or the college of medicine, with which it is closely integrated.

Taking those entities into account, Hershey spokeswoman Megan Manlove said, the total organizational margins were 2.01 percent in 2008, 4.28 percent in 2009, 5.4 percent in 2010 and 3.03 percent in 2011.

One important component that can vary widely is investment income, according to Manuel Evans, Holy Spirit Health System senior vice president and chief financial officer.

2011 was a good year for investments at Holy Spirit Hospital; income from them represented about half of the hospital's net income. But 2012, as a down year for investments, was a different story, Evans said.

The PHC4 figures also don't show net assets and liabilities or bond ratings, which Evans said are also key indicators of long-term performance and don't tend to fluctuate as much as single-year numbers do. HSHS has a BBB+ designation from Fitch Ratings.

Overall, Evans said, the hospital needs a profit margin of 4 to 6 percent to sustain its mission.

"It's a positive story," Evans said. "There's income to invest in further enhancements in the delivery system."

At WellSpan Health, spokesman Barry Sparks also noted bond ratings — Wellspan has a AA from Fitch — as a key indicator of sound systemwide financial performance amid changes.

"In the current health care reimbursement environment, hospital acute and outpatient care represents the most significant source of revenue across the health care continuum," Sparks said. "In the future, this is likely to change, as provider organizations will be compelled to bundle services that include hospital care, physician services and other essential health care services."

Ciccocioppo noted that the PHC4 figures also include for-profit hospitals that have to pay taxes from which the nonprofits are exempt.

In Central Pennsylvania, the for-profits are three Health Management Associates Inc. facilities: Carlisle Regional Medical Center, Heart of Lancaster Regional Medical Center and Lancaster Regional Medical Center. A fourth, Memorial Hospital, was nonprofit in 2011 but became for-profit upon being acquired by Community Health Systems Inc. in 2012.

All three HMA hospitals responded to requests for comment with a statement that they do not provide individual financial statements on hospital performance but that their revenues exceed expenses and the hospitals are healthy. Like the nonprofits, they also stressed reinvestment in the community.

"For instance, we invested $68 million into the community when we replaced the old Carlisle Hospital in 2006," said Carolyn Moore, CRMC director of marketing and business development. "Over the course of the last five years, we have invested more than $23 million for additional facility and service improvements, all while providing $57 million in employee wages and benefits, $14.2 million in uncompensated care and $2.2 million in taxes in 2011.

Click here to download a PDF file on the fiscal health of the midstate's hospitals.

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