Financial analysts sound gloomy when talking about the outlook for hospitals.
More patients are getting care elsewhere, they say, while insurance companies and the government are trying to pay less for every test, surgery or procedure provided.
Yet Twin Cities hospitals and the large groups that run them seemed to hold their own financially last year, as the nation’s health care system prepared for sweeping changes in 2014 with the federal Affordable Care Act.
Eight of 11 health systems based in the five-county metro area posted better operating results in 2013 than during the previous year, according to a Pioneer Press analysis.
As a group, the local hospital systems — typically including clinics and large regional anchor medical centers — posted a collective operating income of about $373 million last year, an increase of roughly 5 percent from $354 million during 2012.
Hospital systems included in the Pioneer Press analysis collected about $12.3 billion in revenue last year. So the profit margin worked out to about 3 cents per dollar of revenue.
“That’s a good number,” said Martin Arrick, an analyst with Standard & Poor’s, a bond ratings agency.
Noting that hospitals in the Twin Cities also had a 3 percent profit margin in 2012, Arrick commented: “The fact that it’s stable is also favorable.”
“They’re holding their own at a time of great change and transformation,” said Lawrence Massa, chief executive of the Minnesota Hospital Association, a trade group. “Our hospitals have been very steady.”
PENT-UP DEMAND
Flat earnings might not sound very sexy. But it’s better than what many hospitals across the country were seeing last year.
In April, the Moody’s bond rating agency reported that operating margins and operating cash flow margins dropped in 2013 at nonprofit hospitals across the country; revenue growth continued to slow and failed to keep pace with expenses.
Of the 203 organizations included in the Moody’s survey, the median profit margin fell to 2.2 percent last year from 2.5 percent in 2012.
In June, Modern Healthcare magazine analyzed data from 179 health systems across the country and found the average operating margin fell from 3.6 percent in 2012 to 3.1 percent in 2013. About 61 percent of organizations in the Modern Healthcare survey saw their operating margins deteriorate during the time period.
“We currently have a negative outlook on the not-for-profit health care sector,” said Sarah Vennekotter, a Moody’s analyst. “There are a lot of challenges that the industry is going to continue to face.”
In recent weeks, some for-profit hospital companies have reported surprisingly strong 2014 financial results, which are adding a new wrinkle to the otherwise gloomy outlook, said Arrick of Standard & Poor’s. The Affordable Care Act has led to an expansion of health insurance coverage — particularly through state Medicaid programs — and the result is more revenue for hospitals.
But Arrick predicted the bounce would be short-lived.
“This group of people who now have insurance cards will roil the numbers for a year or two, because our sense is there’s pent-up demand there for services,” Arrick said. “But once that rolls through and is in the baseline, all the trends are toward less utilization.”
While financial analysts see gloom in the hospital sector, consumers looking at hospital bills keep seeing an increase in prices, said Betsy Imholz, special projects director with Consumers Union, the policy division of Consumer Reports magazine.
In some parts of the country, Imholz said, hospitals have merged with other medical centers and expanded into out-patient services in ways that have given them market power and higher payment rates.
“Relative to some other parts of the economy, hospitals are doing pretty well,” Imholz said.
DEFUSING COSTS
To evaluate the financial health of hospitals in the Twin Cities, the Pioneer Press collected audited financial statements from hospitals and hospital systems based in Anoka, Dakota, Hennepin, Ramsey and Washington counties. The figures don’t include investment income.
By revenue, Minneapolis-based Allina Health System, operator of United Hospital in St. Paul, was the largest operator of hospitals and clinics around the five-county region last year. Allina’s operating profit margin for the year was about 4 percent, but things took a turn for the worse during the first quarter of 2014. In May, Allina officials said they were looking to cut $100 million in operating costs after the health system barely broke even for the three-month period ended March 31.
There have been few details on how the cuts will be made, but officials say large layoffs aren’t in the works.
These are challenging times for health care systems, said David Kanihan, an Allina spokesman. Patient volumes are shrinking at a time when hospitals must make investments to participate in new “accountable care organizations,” or ACOs.
These contract arrangements try to contain costs by setting a budget for health care providers as they serve a specified group of patients. If actual care costs exceed the budget, hospitals and doctors lose money. If costs are less than the budgeted amount, the health care providers can share in the savings.
Hospitals need good — and costly — information systems to enter into these arrangements. Plus, the contracts provide clear incentives to contain costs.
Allina and other health systems are involved in ACO-style contracts with government insurance programs and/or commercial health plans.
“Hospitals in this market are not bucking the trend,” Kanihan said in a prepared response to questions.
OTHER RESULTS
The Minneapolis-based Fairview system, operator of the University of Minnesota Medical Center, posted a slightly higher profit figure than Allina, with operating income of $134 million on just under $3.4 billion in revenue.
The operating profit was better than in 2012 and represented a significant improvement over 2011. At that time, Fairview earnings were hurt by one-time charges as the health system was implementing a new electronic health record system and opening a replacement children’s hospital.
“The 2013 performance was much improved over the past few years,” said Rulon Stacey, Fairview’s chief executive officer, in an interview. “It has rebounded from a point where it was unsustainably low.”
Income was up last year at Children’s Hospitals & Clinics of Minnesota, which has hospitals in Minneapolis and St. Paul, as well as at Gillette Children’s Specialty Healthcare, which is based in St. Paul. The local results fit with a broader trend in which children’s hospitals across the country out-perform medical centers for adults, said Alec Mahmood, chief financial officer at Children’s.
The financial picture got a little gloomier last year at Hennepin County Medical Center in Minneapolis, which posted a $28 million operating loss. That was worse than in 2012, when HCMC had a loss of nearly $9.3 million.
Operating margins have suffered because the hospital is making strategic long-term investments, said Thomas Hayes, an HCMC spokesman. The hospital has expanded its network of primary care clinics, opening locations over the past five years in Brooklyn Park, St. Anthony Village and Golden Valley.
“HCMC initiated action plans to improve revenues/decrease expenses by 5 percent in 2013 and another 5 percent in 2014,” Hayes said in a prepared response to questions. “We are currently operating at break-even through the first half of 2014.”
Lakeview Health in Stillwater posted a $1.8 million loss on operations last year due in part to extra expense with its electronic health record, said Dave Dziuk, the chief financial officer at Bloomington-based HealthPartners, which owns the hospital and a related network of clinics. Lakeview also has hired new physicians and opened a new clinic in Mahtomedi.
“It takes a while for patient volume to ramp up with the hiring of new physicians and opening of the new clinic,” Dziuk wrote in an email.
In terms of revenue, Northfield Hospital was the smallest health system in the Pioneer Press analysis, but also posted one of the highest profit margins last year at about 5 percent. The income is helping the hospital build reserves and make investments, including $2 million for an improved MRI magnet.
“Although our bond rating has gone up recently, I believe the rating agencies look at this sector as volatile,” said CEO Steve Underdahl in a statement. “My sense is that bond rating organizations look at all of the variables and unknowns associated with health care reform, new care delivery models and new customer expectations, and find the future of our industry difficult to predict.”
UNKNOWNS PERSIST
As in other states, Minnesota has seen a decline in its uninsured rate this year. But it’s possible the change will have less impact on hospital finances here than elsewhere, said Massa of the Minnesota Hospital Association, because the state already had one of the nation’s lowest uninsured rates.
The low uninsured rate over the years is one reason why hospitals here traditionally have been relatively strong financially, said Vennekotter, the analyst with Moody’s. Another factor, she said, is that Minnesota hospitals were early to the trend of creating multi-hospital networks that include clinics, so that care can be better coordinated for efficiency.
Finally, Minnesota hospitals benefit from a relatively strong local economy, Vennekotter said, including a low unemployment rate.
But in general, the gloom persists.
“Reimbursement will continue to be tight,” Vennekotter said. “You have the trend of declining employer-sponsored health insurance plans, plus higher deductibles and co-pays, which means higher bad debt for hospitals and lower profitability.”
Christopher Snowbeck can be reached at 651-228-5479. Follow him at twitter.com/chrissnowbeck.
