Benefis Healthcare, the two-hospital system that controls acute-care services in Great Falls, Mont., registered a $9.1 million profit last year thanks to a sympathetic state attorney general.
That's a far cry from the possible $3 million in losses the system projected as it sought lucrative antitrust concessions it won from the state last year.
"The (certificate of public advantage) adjustment had quite an impact on our finances," acknowledged Wayne Dunn, Benefis' vice president of finance.
But Dunn emphatically denied that the system overstated its losses to gain those concessions.
"We've worked hard to maintain a good and honest relationship with the state," he said.
Montana Attorney General Joseph Mazurek said he agreed that the financial swing was significant, but he said he doesn't think his office was manipulated by Benefis. Even with the concessions, the system's prices were lower and charity-care spending was higher than before the merger was completed.
"The objective was to reduce costs to consumers and guarantee there was a surviving healthcare entity in Great Falls," Mazurek said.
He said the Federal Trade Commission has the option to investigate any allegations that Benefis has violated the state agreement or engaged in any anti-competitive behavior. The FTC dropped its initial investigation of the proposed merger of Great Falls' only two hospitals because of the state's interest in monitoring the hospitals' post-merger behavior.
Benefis' $12.1 million turnaround last year is noteworthy because the two hospitals that formed the system were the first in the country to merge under a new state healthcare antitrust exemption law.
Such laws allow competing healthcare providers to merge if they agree to certain restrictions to protect the public, payers and other providers from anti-competitive behavior.
In March 1996 the Montana attorney general's office approved the merger with strings attached. After agreeing to the conditions, the hospitals, 339-bed Montana Deaconess Medical Center and 145-bed Columbus Hospital, completed their merger on July 1 of that year.
The merged hospitals now staff just 304 beds combined, with most inpatient care provided at what was the Montana Deaconess campus and the bulk of outpatient procedures done at what was the Columbus campus.
Among the restrictions, which were to apply at least through 2006, the hospitals initially agreed to:
* Generate $109.2 million in savings from 1996 through 2006 by limiting price increases and reducing operating expenses.
* Limit annual price increases to the hospital component of the U.S. Labor Department's Producer Price Index, which measures changes in wholesale prices.
Under the agreement, revenues in excess of an agreed-upon cap in any one year could be returned to consumers in the form of lower prices the following year or held in reserve and returned to the state once they totaled more than $3.5 million.
Despite the limitations, the hospitals posted a $7 million profit on $140 million in revenues in 1997. But, according to Benefis, the restrictions caught up with the system in 1998.
In January 1999, Benefis went to the attorney general's office, seeking modifications of the antitrust agreement. The system told the state it was going to lose as much as $3 million in 1998 on revenues of about $128 million. In fact, the system said it could lose as much as $25.7 million from 1998 through 2003 unless the state agreed to concessions.
After some negotiations, the state agreed to make some changes to the agreement, retroactive to Jan. 1, 1997.
The revised agreement:
* Allows Benefis to raise prices equal to the increases in the "marketbasket" index, which HCFA uses to measure what hospitals spend on common goods and services to provide care. Because that index is typically higher than the PPI, the change was projected to give Benefis an additional $51 million in revenues over the length of the agreement.
* Lowers the cost-savings estimate over 10 years to $69.7 million from $109.2 million-a break worth $39.5 million to Benefis.
Much of the resulting adjustments to Benefis' bottom line came through accounting changes.
For example, in 1998, agreement changes allowed it to increase its allowance for total expenses by more than $6.2 million to $119.4 million. They also allowed Benefis to trim operating expenses by only $4.9 million compared with the $7.3 million the original agreement mandated.
The two changes accounted for a swing of nearly $9 million and were the most significant reasons for the turnaround, Mazurek said.
Also, Benefis charged more for services in 1998: Inpatient prices went up an average of 4%, while outpatient prices rose 2.8%. Shortly after the merger it lowered inpatient and outpatient prices by about 17%.
Dunn said he did not think Benefis was given a gift from the attorney general's office, noting that Benefis' 1998 profit margin was just under 7%.
The antitrust agreement recommended a maximum 6% profit margin, but there's no penalty for exceeding it. Dunn said the profit margin is a guideline only and may be exceeded if Benefis adheres to the revenue and expense restrictions.
"We've never had our profit regulated," he said.
U.S. hospitals had an average profit margin of 5.7% in 1998, according to the American Hospital Association.
"It's a reasonable bottom line," Dunn said of the 1998 numbers. "I don't think the (attorney general) gave away the farm here. We both walked away from the renegotiation feeling it was fair."
For 1999, Benefis projects net income of $4 million to $5 million. Dunn attributed the anticipated dip from 1998 to cuts in Medicare reimbursements. Benefis had projected a $6 million loss in 1999 under the original terms of the agreement.
Beth Baker, the Montana chief deputy attorney general who monitors the antitrust arrangement with Benefis, said there wasn't an immediate need to revisit the terms of the agreement because of the 1998 and 1999 profits.
Baker said the merger has generated other benefits that outweigh any reasonable profit generated by the system. She referred to a report issued by the attorney general's office earlier this month noting that Benefis more than doubled the amount of money it spent on charity care last year to $4.8 million from just $2 million in 1997.
And even with the 1998 price increases, Benefis' prices for inpatient services were 6% lower in 1998 than before the merger in 1995, and outpatient prices were 15% lower, according to the state's report.
Despite the price increases, Benefis' 1998 patient revenues still fell $800,000 short of the revised $133.4 million cap the state imposed earlier this year, according to the state's independent auditor.
"We think it's a good thing Benefis is providing more charity care and lowering prices to consumers at large," Baker said.