The price that Benefis Health Care paid for its monopoly of healthcare in Great Falls, Mont., was too much, too soon.
Representatives of Benefis, created in 1996 through the merger of Great Falls' only two hospitals, were scheduled to meet late last week with officials in the Montana attorney general's office to try to restructure pricing and profits caps so the company can remain solvent. Benefis agreed to the caps and a cut in patient pricing when it formed a monopoly. It also agreed to pass back $86 million in costs savings to consumers over 10 years.
The outcome of last week's meeting was not known at deadline.
Benefis projects a loss of up to $3 million in 1998 on projected revenues of $128 million and nearly $6 million in losses in 1999 on projected revenues of $129 million. In 1997 it had a profit of $7 million on revenues of $140 million.
"The way things are set up right now would kill any hospital," said Lloyd Smith, Benefis' chief executive officer.
Although the attorney general's office did agree to meet with Benefis, it has been cool to the idea. "They're pretty early in implementing the agreement, and we wouldn't be anxious to make significant changes," said Chief Deputy Attorney General Beth Baker, who hammered out the system's original profit-limiting agreement. She declined comment on Benefis' specific requests, noting they were still under review.
Benefis formed from the merger of 339-bed Montana Deaconess Medical Center and 145-bed Columbus Hospital, after a 20-month battle with state regulators and the Federal Trade Commission.
Smith said the monopoly, achieved in part by filing a certificate of public advantage, forced the hospitals to immediately adopt caps, but the agreement ignored the merger costs as well as the entry of two outpatient surgery centers into the Benefis marketplace.
"Most consultants say it takes two years to consolidate nonclinical operations, three for clinical and 10 years to bring two cultures together," Smith said. "This should be a 10-year plan."
Smith said Benefis has cut charges by $30 million a year, but it has had to reconcile that with about $17 million in consolidation construction costs. Also, Benefis has not realized cost savings from staff cuts, still unimplemented.
According to a Dec. 31, 1998, progress report on the COPA issued by the attorney general's office, Benefis' staffing ratios remain higher than the ratios at hospitals of similar size throughout the country-6.4 workers per bed, compared with an average of 5.8. Benefis' 11% cut in the work force has come from attrition, according to Baker.
Benefis has requested that its annual price increases be set by the marketbasket index, or the prices hospitals pay for supplies and labor to provide care. Currently the U.S. Labor Department's Producer Price Index determines price increases. Smith projects a $51 million gap over the next decade between the marketbasket index and the PPI.
Benefis has asked that the equations used to set the revenue cap be revisited.
"It's too intricate, and assumes that all our operations are equally profitable, which is not the case," Smith said. Even a slight error in the equations costs Benefis millions, he said.
Benefis' few competitors suggest that the company look harder at itself than at the agreement. "They should be striving more to achieve appropriate staffing ratios, and for that to occur, they need to make appropriate management decisions," said Daniel Boatman, CEO of Central Montana Surgery Center, an outpatient clinic that opened in Great Falls earlier this month. It had been scheduled to open in April 1998, but Benefis fought its certificate-of-need application in court. Benefis also fought the CON application of 90-physician Great Falls Clinic, which, like Central Montana, wanted to run an inpatient facility but ultimately opened an outpatient center.
Smith insisted that the agreement be revisited partly because of Benefis' vulnerability. Central Montana and the Great Falls Clinic center are expected to cut into Benefis' margins by $2.7 million this year and $4 million next year. Benefis has a 49% stake in the outpatient surgery center opened by Great Falls Clinic, however, as a result of the CON litigation (Jan. 5, 1998, p. 2).
Meanwhile, at least one other Montana hospital operator is sympathetic to Benefis. "Sudden drops in the bottom line are nothing new," said Donald Rush, CEO of 135-bed Sidney (Mont.) Health Center. Sidney Health's net income this year is expected to be half of last year's $1.5 million because of Medicare-reimbursement changes, he said.