Although the ongoing recession was—and continues to be—a major management challenge, several observers say the painful market correction also had positive effects for their finances and their executives.
“I think it strengthened our management team, as to how to focus, and what we needed to focus on, from an operational perspective, and taking a look at things from a system perspective, and focusing on the patients,” says David Eager, senior vice president and CFO of 12-hospital Aurora Health Care, based in Milwaukee.
Aurora posted 14% growth in net patient revenue in 2009, exceeding the healthy average rate of growth for all systems in the survey. Eager says the system's executives used the credit crisis to force themselves to find ways to maximize efficiency in the supply chain, revenue cycle and integrated care delivery, while building business in service lines like cancer treatment and getting certain physicians to admit more patients.
All of those efforts led to a 63% increase in net operating income between 2008 and 2009. “We saw the decline in the economy as an opportunity. Some of our competitors saw the recession as a reason to hunker down,” Eager says.
However, the overarching trends seen in the survey of health systems can mask heavy volatility seen in individual systems. Seven individual systems experienced stunning reversals of more than $1 billion each in net income during their fiscal years. Six of the systems saw their net incomes move more than $1 billion in a positive direction, while 67-hospital Ascension Health saw its profits drop by $1.07 billion.
Ascension, a St. Louis-based Roman Catholic system, was among the unlucky group of organizations whose July-to-June fiscal year captured the worst of the stock market free-fall in late 2008 and early 2009, dragging down its balance sheet far worse than would have been the case from operations alone.
The data in the survey clearly show that systems whose fiscal years included the stock market turnaround in the second half of 2009 looked far better on paper than their competitors. For example Catholic Health East, a 28-hospital system based in Newtown Square, Pa., that operates on a January-to-December fiscal year, posted a net income gain of about $1.5 billion.
Martin Arrick, a managing director with ratings agency Standard & Poor's, says he wouldn't be surprised if two-thirds of the $16.6 billion one-year upswing in net income reported by the systems in Modern Healthcare's survey was attributable to the performance of investments, rather than operations.
Arrick echoes Eager's sentiments that the management response to the recession may have strengthened many hospitals in the long run by forcing them to find immediate ways to make operations more efficient.
And the push toward efficiency—it may have felt more like a shove, in some cases—couldn't have come at a better time, given that the enactment of this year's Patient Protection and Affordable Care Act reform law is almost certain to mean lower reimbursements for many hospitals in the years ahead.
“If you start doing that now, in advance of all these pilots and demos, that just drops to your bottom line in the interim,” Arrick says of cost-cutting efforts. “To the extent that you're out there in front, we're sort of feeling that the future is guarded, but the next few years could be wonderful in terms of operations.”
In what might be called the Ten Figure Club, six systems in the Modern Healthcare survey had billion-dollar year-to-year swings in their profitability in the positive direction. In addition to Catholic Health East and its $1.5 billion gain, the others are: BJC HealthCare, St. Louis (up $1.4 billion); Mayo Clinic, Rochester, Minn. (also up $1.4 billion); Advocate Health Care, Oak Brook, Ill. (up $1.1 billion); and Cleveland Clinic Health System (also up $1.1 billion).
The system that recorded the largest improvement was Banner Health, which posted $823 million in net income in 2009 after logging a $767 million loss the year before—a $1.6 billion reversal of fortune in the space of one year for the 21-hospital system, based in Phoenix.
Though remarkable on its surface, the Banner story mirrors another trend in the data: Each of those most-improved systems posted net losses in fiscal 2008 of more than $400 million. And all of them were not-for-profit.
Dennis Dahlen, senior vice president and CFO at Banner, says the shock of the market crash and a loss of more than $300 million on interest rate swap deals forced management into an immediate austerity plan that included reducing paid time off benefits and shift-differential pay and a workforce reduction of 300, along with $50 million in overall productivity savings across the system. “What I'm proud of … is the way that this organization rose up when we faced a difficult financial challenge,” Dahlen says.
Frank McGinty, executive vice president and treasurer of Portland-based MaineHealth.
Banner also saw fairly consistent operational performance throughout the crisis, but that wasn't the story everywhere. Four systems in the survey posted negative swings in operating income of more than $100 million: Jackson Health System, Miami, down $191 million; LSU Health System, Baton Rouge, La., down $191 million; Trinity Health, Novi, Mich., down $150 million; and Ascension, down $111 million.
Jackson's case was particularly notable because the 2009 drop in operating income came after a year in which the system already had posted a major loss the previous year, $426 million on operations in 2008. Jackson lost $619 million on operations in 2009.
The publicly run, six-hospital system based in Miami logged a $185 million write-down on receivables in 2009, after a realization within the system that previous collection estimates on charges were far too optimistic, especially given patients' newfound financial hardships.
Ted Shaw, interim CFO at Jackson, says public systems across the country are reporting difficult operating environments, as the demand for services increases while the willingness by local and state governments to fund safety net healthcare wanes.
“When I talk to my peers around the country, everyone is thoroughly challenged by a lack of funds for this mission,” Shaw says.
For those systems that did manage to find above-average gains in revenue and income, several say that not just austerity, but merger-and-acquisition activity was part of their strategy. Six-hospital MaineHealth added two hospitals through mergers and acquisitions during 2009, which accounted for two-thirds of the system's 33% net patient revenue growth in 2009.
“As hospitals were buffeted by the recession, they were looking to align,” says Frank McGinty, executive vice president and treasurer of the Portland-based system. “We think it makes a lot of sense. We think we can accomplish more by working together.”
In a reversal of past trends, not-for-profit systems did better on several financial measures than their for-profit peers.
For instance, not-for-profit systems participating in the survey earned far more patient revenue per hospital than their investor-owned peers in 2009, and they saw larger revenue gains. The not-for-profits earned an average of $223 million in patient revenue per hospital, while the for-profits reported $98 million per hospital in payments from patients.
In the Modern Healthcare
survey, the average for-profit system had 49 hospitals, while the average not-for-profit system had eight. Hospital counts in the survey are for 2009 and are self-reported. Totals include acute-care, psychiatric, rehabilitation and long-term acute-care facilities.
Examining the figures for net income, including all types of hospital revenue and expenses, not-for-profit systems saw larger average increases than their tax-paying competition, with an $82 million average rise in net income at not-for-profit systems vs. a $54 million average rise in net income at for-profit systems.
Then again, after a bruising 2008, the not-for-profits had far more ground to make up. Observers say the tax-exempt systems tend to hold far larger investment portfolios, which makes them more vulnerable to market swings. In fiscal 2008, the average not-for-profit system in the survey posted a $32 million net loss on the year, and then climbed back to a $50 million profit in 2009.
“I think the reason for that swing is directly attributable to the recovery of the investment markets,” says Jeff Schaub, a managing director with Fitch Ratings.
The large for-profit systems simply didn't lose their financial footing during the recession to the degree seen at the not-for-profits, the Modern Healthcare survey results show. The average investor-owned system posted $111 million net income in fiscal 2008, and earnings grew to $165 million in fiscal 2009.
The collapse of financial markets and the deepening recession in the past few months of 2008 set expectations for 2009 that bordered on apocalyptic at for-profit providers, says Sheryl Skolnick, senior vice president of CRT Capital Group, a Stamford, Conn.-based investment advisory firm. With unemployment rising rapidly, the fear was that hospitals would face a sharp increase in uncompensated care amid an overall volume decline.
“In 2009, we started the year scared witless,” Skolnick says. “So the operating strategies were: conserve cash, conserve cash, conserve cash; cut costs, cut costs; conserve cash.”
To accomplish these strategies, the investor-owned hospital companies cut capital spending, moderated labor costs and extended debt maturities, even at the cost of higher interest expense, Skolnick says. On the labor front, some companies reduced or eliminated their matching payments for retirement accounts, she adds. Many of the companies have reported lower use of expensive contract labor as well. Cash bonuses for executives were trimmed or eliminated at some companies, Skolnick says.
When the apocalypse didn't arrive—that is, when volume didn't crater and uncompensated care only edged up—these conservative strategies enabled hospital companies to post strong operating margins.
One thing that really helped was how much better the companies have gotten at dealing with uninsured patients, a problem that has been building since at least 2003, Skolnick adds. They are much more adept at finding lower-cost settings, such as urgent-care centers, and providing more financial counseling for uninsured patients, she says.
When credit markets loosened as 2009 went on, investor-owned hospital companies began to pursue growth through acquisitions again. “It was almost like two completely different years,” Skolnick says. The fruits of their pursuit have been showing up through the first half of 2010, as major deals were announced in Boston and Detroit (April 5, p. 6), and a slew of smaller deals.
In 2009, Iasis Healthcare Corp., Franklin, Tenn., and Tenet Healthcare Corp., Dallas, exhibited many of the strategies that Skolnick describes.
In its fiscal 2009, which began Oct. 1, 2008, Iasis reacted to the climate by reducing its capital expenditures, says Carl Whitmer, the president of Iasis who will become its CEO after David White retires from that position at the end of this year. After spending $137 million on capital projects in fiscal 2008, Iasis spent $88 million in fiscal 2009. Some of the decline is explained by the completion early in fiscal 2009 of two bed tower projects in Utah, Whitmer says. And its capital expenditures were directed more toward clinical operations, such as spending on information systems, than on construction projects, he adds.
Going forward, information systems are going to be the key strategy to align physicians' interests with those of hospitals, says White, who will remain chairman of Iasis after relinquishing the CEO post. Hospitals able to smoothly link their information systems with those of their physicians will benefit greatly, he says.
While the company did not change its contributions to retirement accounts, it did focus on being more efficient with staffing, ensuring that staffing on any given day matches volume, Whitmer says. The rest of its effort to battle costs was around improving processes and clinical operations, Whitmer adds. The company drew on its clinical information systems to improve utilization of supplies and drugs, for example, he says.
Tenet, meanwhile, cut its match percentage for employee contributions to retirement accounts in half, although its performance in 2009 allowed a one-time, discretionary payment that restored about two-thirds of the cut. The company also sought to further standardize care for Medicare patients to improve quality and cut costs; to expand its physician-alignment strategies and outpatient services; and to improve clinical quality and service, including the hiring of a full-time chief medical officer, says Steve Newman, Tenet's chief operating officer.
With the Medicare initiative, Tenet began a study of key DRGs at each hospital by a cross-disciplinary team that recommended ways to improve workflow and standardization, Newman says. This phase of the initiative should be rolled out at all of its hospitals by the first quarter of 2011, he says.
The company also formed a joint venture with Med3000—a Pittsburgh-based provider of healthcare management and technology services—to supply IT services for physicians who practice at its hospitals, Newman says. The joint venture will help roll out healthcare IT systems in physician offices as an alignment strategy, he says.
Tenet is spreading best practices from its free-standing outpatient centers to its hospital-based outpatient centers to make the hospital-based centers more competitive with competing free-standing centers, Newman says.
Tenet, he adds, is “full steam ahead” with adapting to healthcare reform: “We are very encouraged that the bulk of our beds and hospitals operate in markets with disproportionate levels of uninsured.”