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.”
The 207 organizations that took part in Modern Healthcare's 34th annual Hospital Systems Survey reported a collective net income of $11.9 billion in fiscal 2009—a significant swing from the prior year, when the same systems posted a net loss of $5 billion, driven by heavy losses in the securities markets. 