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Belt
tightening and moves to greener pastures help hospitals
earn profits
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by
Karl Rhodes
For
Virginia Business
November 2003
By
last summer, it was obvious that MCV Hospitals in Richmond
was having money problems. For three years in a row
it had barely broken even, and its management team realized
they needed help. So they called in a consultant to
pick through every detail of hospital operations. “We
were really headed for a distressed situation,”
says Sheldon M. Retchin, CEO of Virginia Commonwealth
University Health System.
After
doing more than 200 interviews and gathering data from
insurers and even the hospital’s competitors, the
experts came back with a package of recommendations
— such as ways to maximize reimbursements or where
to cut staff — designed to save $130 million over
three years. Taking that advice wasn’t easy. “A
lot of people agreed to do more with less, and everybody
understood the consequences,” Retchin says. It
seems to be helping. In fiscal 2003 MCV’s operating
margin climbed to 3.2 percent — not great, but
still a welcome change.
The
pressures that pushed MCV toward the edge are being
felt at many of Virginia’s hospitals. Reimbursements
under the state’s Medicaid program are low. Labor
costs are high, especially for nurses, and the cost
of new technologies and drugs are increasingly more
than what insurers will pay. The result is a dramatic
slide in hospitals’ financial health. Industry
experts say hospitals need annual operating margins
of at least 4 percent. But in Virginia the average margin
dropped from 8.5 percent in 1997 to 3.7 percent last
year, according to the Virginia Hospital & Healthcare
Association.
Some
Virginia hospitals aren’t waiting for a miracle
cure. A few are doing the belt-tightening that helped
MCV. Others are pulling up and building new facilities,
often in better markets nearby. New hospitals have several
advantages: It’s easier to recruit doctors, nurses
and other staff. And they are better designed, with
more outpatient facilities, fewer beds, greater efficiencies
and better technology.
What all hospitals face is the state’s stingy Medicaid
reimbursement program, says Laurens Sartoris, president
of the Virginia Hospital & Healthcare Association.
The state has stricter eligibility requirements and
lower reimbursement rates than most other states, according
to a recent study sponsored in part by the hospital
association. Virginia spent $3.1 billion in Medicaid
in fiscal 2001, for example, less than half what North
Carolina spent, according to the study, done by Richmond-based
Fiscal Analytics.
Overall
Virginia spends about $1.5 billion less than comparably
sized states. “When you read the newspaper and
government officials say, ‘We’re going to
save Medicaid and Medicare,’ what they’re
really saying is, ‘We’re going to cut reimbursements
to your hospital,’” says Mark K. Floro, president
of Wellmont Lonesome Pine Hospital in Big Stone Gap.
While
Virginia’s Medicaid spending jumped to $3.78 billion
in fiscal 2002, Sartoris says that doesn’t keep
up with inflation and increasing demand. And the gap
is growing wider: At the time of the study Virginia
was reimbursing hospitals for 79 percent of their inpatient
operating costs for Medicaid patients. On July 1 that
was dropped to 71 percent, Sartoris says. Hospitals
make up the difference by charging other patients more,
but that doesn’t cover the difference because commercial
health insurers negotiate deep discounts of their own,
says Robert A. Broermann, chief financial officer of
Norfolk-based Sentara Healthcare. “So the ability
to shift all of the costs of Medicare and Medicaid to
commercial payers is gone.”
Those
pressures are partly why some hospitals look for greener
pastures. Sentara Hampton General Hospital, for example,
moved about 5 miles to a more economically vibrant area
of Hampton, where it opened a new facility in December
2002. Sentara also changed the hospital’s name
to Sentara CarePlex Hospital. During 2001 and 2002,
Hampton General’s operating losses averaged about
10 percent, but some of that can be attributed to patients’
reluctance to use a facility that was about to close,
Broermann says. Prior to 2001, Hampton General was “not
doing poorly, but it was not earning significant margins
either,” he says.
As
financial pressures increase, older hospitals are naturally
the first to show the strain. The Northern Virginia
Community Hospital in Arlington, which opened about
40 years ago and now competes with larger hospitals
nearby, had an operating loss in 2001 of nearly 19 percent.
It was bought last year by Nashville, Tenn.-based HCA,
which owns 14 hospitals in the state. HCA promptly announced
plans to close the Arlington facility and open a new
one 25 miles west in fast-growing Loudoun County.
Hospital
CEO Bryan Dearing says expanding or renovating the current
building wasn’t feasible. HCA may not get its wish,
though. Virginia Health Commissioner Dr. Robert B. Stroube
in March turned down its application to move to Loudoun.
Among other objections, Stroube noted that several hospitals
are expanding in Loudoun and Fairfax counties, and he
wanted to see what impact those projects will have on
demand for medical care. HCA is challenging the ruling
in Richmond Circuit Court and has filed an amended application
with the commissioner; a ruling on that is due in February.
In
Roanoke, Carilion Health System announced a $105 million
expansion of Carilion Roanoke Memorial Hospital and
plans to consolidate its clinical services there, moving
some services from the nearby Carilion Roanoke Community
Hospital. Carilion says merging services of the two
hospitals will save more than $4.7 million in operating
costs per year, eliminating the need for other renovation
projects and a new building. It plans to submit an application
for a Certificate of Public Need to the state’s
health commissioner in January.
Many
small, rural hospitals are also hurting. They face all
of the challenges mentioned above and then some. Recruiting
costs, for example, are higher in rural areas, and good
employees are the key to a better bottom line, says
Floro at Wellmont Lonesome Pine Hospital in Big Stone
Gap. Wellmont recruited Floro to run the hospital in
November 2001 after Lonesome Pine lost more than $2.6
million in fiscal 2001. The following year, the hospital
cut its operating loss to $300,000, and last year it
made a small profit — $14,000 — “and
we are celebrating,” he says.
Getting
that far meant drastic changes. Floro has replaced 15
of 20 department managers since he joined the hospital.
“Then we started digging. We got into systems and
reimbursements. … We looked under all the rocks
and tried not to be afraid of what we might find.”
Soon after Floro took the hospital’s helm, he sent
out anonymous surveys to the hospital’s doctors,
board members and employees. Floro challenged his staff
to turn things around, and they did. “We set our
productivity levels, and then we hit them. There isn’t
much browbeating. It’s just a matter of, ‘This
is what we must do to be successful.’”
The
hospital also has attracted more doctors. Medical Associates
of Southwest Virginia, a large group of physicians based
in Norton, decided in 2001 to start sending most of
its patients to Lonesome Pine instead of two other hospitals
in the area. Wellmont owns the physicians’ group,
but the group’s decision to switch its privileges
to Lonesome Pine was made independently, Floro says.
Even
with these new doctors, profitability doesn’t come
easily, particularly in Big Stone Gap, a town struggling
to recover from declines in the coal industry. Lonesome
Pine relies heavily on Medicare and Medicaid reimbursements,
and many of its patients have no insurance at all. “When
you are writing off 60 percent of your [gross] revenues,
it’s tough to make a profit,” Floro says.
“This issue with rural hospitals is critical across
the nation. If we lose our rural hospitals, we lose
the cornerstones to America’s health.”
Retchin,
the CEO of VCU Health System, feels the same way about
academic medical centers. In fact, MCV Hospitals share
many of the same challenges as small rural hospitals,
and moving to greener pastures is not an option. The
primary way they can improve the bottom line is to improve
their operation. The consultant’s recommendations
provided “a shot of enthusiasm,” he says.
“I really have to credit the employees — the
faculty, the nursing staff, the senior leadership. It’s
true we brought in outside consultants, but everybody
bought into it. It was really incredible.”
Still,
MCV’s financial problems are something of a chronic
condition. It is still short of the recommended 4 percent
margin that most hospital administrators say they need.
“At a minimum, we have to keep this momentum and
not lose any of the margin that we’ve been generating,”
Retchin says. “We don’t want to go back to
where we were.”
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