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Health: Hospital contraction likely as investment income, occupancy rates decline
Sunday, March 25, 2001 By Pamela Gaynor, Post-Gazette Staff Writer
Having received two consecutive rounds of economic support from Washington, hospitals will likely have to look elsewhere this year to solve their financial problems.
All told, their lobbyists helped them recoup about 25 percent of the Medicare dollars that were cut from the federal budget in 1997. And even hospital industry advocates don't think Congress is disposed to do much more.
That's not to say the region's hospitals are feeling flush. The council's quarterly survey showed that 26 of 56 southwestern Pennsylvania hospitals lost money on patient care during the three months that ended in September.
For that reason, hospitals here will probably continue "the process of rationalization," said Ian Rawson, executive director of the Hospital Council of Western Pennsylvania. "Contraction [is something] we're going to see -- for better or worse."
In addition, legal experts expect hospitals to unwind more of the unprofitable acquisitions of physician practices that they rushed into in the last half of the 1990s.
And with little further relief in Medicare payments expected, hospitals also are stepping up demands for private insurers to roll back some of the discounts they negotiated as managed care unfolded here during the last decade. Higher hospital payments -- combined with already surging pharmaceutical costs -- mean employer health plans can expect double digit premium increases to continue.
Further contraction of the region's hospital industry is likely to take the form of reductions in beds and elimination of unprofitable services, if not outright hospital shutdowns, according to industry analysts.
Between the end of their 1995 fiscal year and last June, southwestern Pennsylvania hospitals had already taken nearly a quarter of their beds out of service. Including the 75 or so that St. Francis Health System scheduled for shutdown last spring when it disclosed plans to close St. Francis Central Hospital, the number of staffed beds fell during the period to 7,326 from 9,612, according to the hospital council's statistical surveys. Not included in the latest total were the beds eliminated when Citizens General Hospital in New Kensington moved its inpatient services to nearby Allegheny Valley Hospital in Natrona Heights.
Still, the cutbacks haven't kept pace with declines in hospital stays, brought on by cost-conscious managed care insurers and new technologies that have pushed more care to outpatient settings.
As a result, average hospital occupancy in southwestern Pennsylvania is lower -- at 63 percent in June -- than it was in mid-1995, when it stood at 67.8 percent.
Financially, hospitals face a double whammy this year, said Walter Wayne, the hospital council's top financial officer. Just as they're trying to reverse some of the discounts given managed care insurers in recent years, they're also facing stock market declines that have undermined their investment income, he said.
Although the hospital council has not yet published southwestern Pennsylvania hospitals' average profitability figures for the quarter ended in December, Wayne said total profit margins, which include investment income, "are the lowest I've documented in the [17] years since I've been doing the [quarterly] survey." Part of the erosion since the last quarterly review came from slimmer returns on core operations, but the biggest factor reducing overall profit margins since June has been declines in investment income, he said.
Southwestern Pennsylvania hospitals went from losing an average of a half cent on every dollar their operations took in in June to earning about a half penny in September. However, total profit margins, which include investment income, slipped to about 2.64 cents for every dollar of revenue to 2.1 cents.
Five years ago in mid-1995, operating profits among southwestern Pennsylvania hospitals averaged about 1.61 cents and total profits, including investment income, were about 3.55 cents for each dollar of revenue.
As they try to shore up their bottom lines and balance sheets, "I think you'll see a lot more scrutiny of services" said Paul Holdren, who heads up Health America's Western Pennsylvania health plans.
Among high profile service reductions last year, troubled St. Francis Medical Center eliminated obstetrics care and occupational health care in an effort to stabilize its rocky finances. UPMC McKeesport also eliminated its obstetrics unit rather than add the kinds of specialists needed to take on high-risk births.
Physician contracts also are getting close scrutiny and some hospitals are refusing to renew unprofitable agreements, if not entirely shedding physician practices from their payrolls as St. Francis Health System plans to do.
What's certain is that buying of physician practices has, for the most part, ended, said Deborah J. Robinson, a Houston Harbaugh attorney whose clients include some of those being terminated at St. Francis.
"I see absolutely no indication of any continuing strategic plan at any hospital to buy physicians," she said.
The strategy of acquiring physician practices, which reached bidding war proportions in the late 1990s, proved a big money loser for most hospitals.
At the same time as they're pruning away money-losing activities, hospitals also are aggressively seeking higher payments from insurers. Health America's Holdren said he'd seen some hospitals come to the negotiating table this year with ambitions to boost payments by as much as 25 percent. He said his company had managed to hold the line, keeping average hospital contract increases within a 10 percent to 12 percent range.
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