Nonprofit health systems increase market share in affluent suburban markets

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When Aurora Health Care proposed a hospital in Grafton, about 20 miles north of Milwaukee, Maureen Slaby heard more than a few people in the community question why the $250 million facility was needed. After all, there were plenty of beds at the Columbia-St. Mary’s hospital five miles away.

Now, four years after it opened, she hears people praise the hospital’s staff and quality of care.

“Everybody I’ve talked to has raved about it,” said Ms. Slaby, who was at the hospital recently to visit her son and his wife after the birth of their first child.

The expansion may have baffled area residents, but it made perfect economic sense: Grafton is in Ozaukee County, the wealthiest county in Wisconsin, with an average household income of $75,854.

And in today’s health care marketplace, hospitals go where the money is.

Ozaukee County and similar markets have a high percentage of people with private health insurance, which pays the best rates. And those patients generate far more profits than ones covered by Medicaid, much less people who have no insurance.

There are other advantages: The larger the system, the more potential leverage when negotiating prices with insurers.

The Aurora expansion is part of a national push by nonprofit health systems to increase their market share in affluent and lucrative suburban markets. In all, nearly two-thirds of the roughly 230 hospitals opened across the country since 2000 are in wealthier areas, a Pittsburgh Post-Gazette/Milwaukee Journal Sentinel analysis found.

“Nonprofit hospitals act suspiciously like for-profit hospitals in many ways,” said Robert Berenson, a physician and fellow at the Urban Institute, a policy research organization in Washington, D.C.

All told, the health systems in the Milwaukee area have spent more than $750 million in the past seven years to build hospitals and clinics in the city’s suburbs. At the same time, they have invested only a fraction of that amount in Milwaukee’s poorest neighborhoods, where there is the greatest need for additional access to health care.

“I understand the behavior,” Dr. Berenson said. “I understand that if you are thinking about your financial bottom line, you are not going to proactively go after serving people who don’t have insurance cards.”

The new hospital in Grafton, as well as those in two other Milwaukee suburbs, were built in a market that already had more hospital beds than any other part of the state and more than the national average.

Critics have contended the new hospitals duplicate services and increase costs. But the facilities also could provide the foundation for increased competition that could slow the rise in health care costs.

Signs of that — such as new health plans tied to Aurora’s larger network — already are appearing in the Milwaukee market.

The Affordable Care Act, which will expand insurance coverage, also could change the economics of providing care in low-income areas. But in the past, and for now, whether a hospital or clinic makes or loses money typically hinges on geography.

For instance, Aurora Sinai Medical Center, the last hospital in Milwaukee’s downtown area, lost a total of $39.2 million from 2008 through 2012, the most recent period for which information is available.

In contrast, the Aurora hospital in Grafton turned a profit ahead of projections, reporting net income of $14 million in 2012, two years after it opened. The nearby Columbia-St. Mary’s was still making money, too. 

It reported a net income of $6.1 million in the 2012 fiscal year, down from $29.1 million in the year before the Grafton hospital opened. At the time, it enjoyed some of the best profit margins — 13.4 percent in 2010 — of any hospital in the Milwaukee area.

Hospital systems say the profits from their suburban hospitals and clinics help them pay for a long list of programs, projects and initiatives aimed at lessening the entrenched disparities in the health between those who live in affluent suburbs and those who live in Milwaukee’s poorest neighborhoods.

Many of those neighborhoods have a shortage of primary care doctors. Yet no health system, other than Children’s Hospital of Wisconsin, has opened a  primary care clinic in a low-income neighborhood in recent years. Instead, they have spent more than $100 million to open new clinics in suburbs, such as New Berlin, Franklin and Brookfield.

“There has been a grotesque skewing in where health care infrastructure investment is being made in southeastern Wisconsin,” said Perry Margoles, who runs Milwaukee Immediate Care Center, a small clinic on the city’s north side.

Unnatural forces

At the same time economics pull hospital systems to wealthy areas, Medicaid payment rates — which often don’t even cover the cost of the care provided — help drive them out of low-income ones.

The clearest sign of the profitability of a hospital or clinic is the percentage of patients covered by Medicaid; the lower the percentage, the healthier the hospital’s balance sheet.

“Those forces are not natural,” said Darrell Gaskin, deputy director of the Hopkins Center on Health Disparities Solutions at Johns Hopkins Bloomberg School of Public Health. “That’s created. We made some decisions about how we’re going to reimburse physicians under Medicaid.

“Someone’s making decisions about what we value and don’t value.”

Wheaton Franciscan Healthcare, which has facilities in Wisconsin and several other states, estimated that the unreimbursed cost of providing care last year to people covered by Medicaid and other local public programs was $99.4 million, including $86 million in southeastern Wisconsin.

Aurora estimated the difference between its costs and what Medicaid and other public programs paid was $309.1 million last year for its entire system.

The two systems reported that they incurred an additional $100 million in costs to provide charity care systemwide.

Allocating costs for any large organization — particularly health systems — is complex. And most health economists contend that nearly every health system could lower  its costs. But no one questions that health systems and doctors overall lose money providing care to people covered by Medicaid.

For a coronary angioplasty that requires a  two- to three-day hospital stay, for example, Medicaid pays $9,280 while commercial insurers typically pay $29,500 to $33,000.

Political support to increase what Medicaid pays hospitals and doctors ranges from limited to nonexistent.

One example: Wisconsin Gov. Scott Walker and the Legislature turned down additional federal money available through the Affordable Care Act to expand the state’s Medicaid program, instead opting for a more limited expansion to be paid for by changing eligibility requirements.

That decision is projected to cost the state roughly $100 million in the current two-year budget — money that could have been used to increase Medicaid payment rates.

One result is many health systems — directly and indirectly and to varying degrees — take steps to limit the number of Medicaid patients they treat.

“In America, what card I have in my wallet determines my access,” said a former Milwaukee-area health system executive, who asked not to be identified so he could speak candidly.

Health systems face a balancing act between fulfilling their social mission and appeasing their fear that providing care to an unlimited number of people covered by health programs for the poor will result in unsustainable losses.

This is particularly true for specialty care, such as cardiology.

“That’s where everybody sort of looks at their shoes,” said the former health system executive. “They hope the patient gets care, but they hope somebody else provides it.”

'Medical arms race’

The incentives in the U.S. health care system also work against the most pressing needs in the nation’s poorest neighborhoods — better access to primary care.

While research shows that areas with more primary care physicians have better outcomes, the market pays a premium for specialty care, such as orthopedics and cardiology, and for high-tech services and procedures. That gives health systems a strong incentive to chase those profits.

In 2008, Wheaton Franciscan opened an $89 million hospital in Franklin, a Milwaukee suburb. A year later, it partnered with a group of surgeons and spent $39 million to open a for-profit orthopedic hospital in the same building. In its first full year of operation, that hospital became the most profitable in the state, reporting a net income of $23.1 million and a pre-tax profit margin of 44.1 percent.

One result is what has been called the “medical arms race,” in which hospitals compete by offering new high-tech services rather than by lowering prices — and then advertise heavily to bring new patients through their doors.

Health care also has a way of creating demand for its services.

Research done by Dartmouth College strongly suggests that in areas with more hospital beds, specialists and other services, people are more likely to be hospitalized, see specialists more frequently and have more tests and procedures done — a phenomenon known as “supply-induced demand.”

New ways of paying hospitals and doctors are designed to move away from the current system of paying hospitals and doctors more when they do more, even when the additional services don’t improve a patient’s health.

But the changes still are in their earliest stages. For now, the incentives encourage the duplication of existing services, potentially increasing costs and resulting in unnecessary care.

That problem doesn’t exist in the poorest neighborhoods of Milwaukee — or the nation.

“We do know that in areas where providers get high reimbursements, patients are vulnerable to overcare,” said Alan Sager of Boston University, who has tracked and studied hospital closures in the United States. “And in areas where it’s Medicaid, or patients are uninsured, they are vulnerable to undercare.”

 Lillian Thomas of the Pittsburgh Post-Gazette and Kevin Crowe of the Milwaukee Journal Sentinel contributed to this report.


Guy Boulton, Milwaukee Journal Sentinel,

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