Southeast Michigan health systems last year battled double-digit increases in drug prices and historically low rate increases from commercial and government payers to post the highest profit margins in several years, according to top system executives.
After several years of continued Medicare reimbursement cuts and financial penalties to help pay for the Affordable Care Act that have dampened profitability, the five systems in metro Detroit that reported 2015 financial data to Crain's Detroit Business positively rebounded by treating more patients and continuing to hold expenses down.
Aiding their efforts to improve profit margins have been double-digit declines in uncompensated care, which includes charity care and bad debt, due primarily to Medicaid and private health insurance expansion that added more than 1 million people in Michigan to insurance rolls.
It's unclear if the decline in bad debt will continue. Last year was a reversal of previous trends of increasing unpaid patient bill, and some hospital executives said they expect bad debt to increase again as more people are covered by high-deductible health plans, which put more responsibility for paying on patients.
Last week, Crain's reported record average 2015 profit margins to 3.9 percent for Michigan's 14 Medicaid HMOs, which also was primarily stimulated by Healthy Michigan expansion of 619,000 new enrollees. Most hospital-based systems also experienced modest gains in patient volume from the Medicaid expansion and from more acutely ill patients in clinical service lines such as neurology, orthopedics and cardiac care.
For example, Beaumont Health, a newly formed eight-hospital system based in Southfield, enjoyed an operating income increase of 13.7 percent to $140.7 million in fiscal year 2015 ended Dec. 31. Beaumont's operating margin rose to 3.4 percent from 3.1 percent in 2014.
"We met (our budget) plan, plus a little better than that," said John Fox, CEO of Beaumont Health. "The reality is if you are in health care today, because of the need to replace building and equipment and new technology, you want to (generate margins of) 4 percent or greater."
Detroit-based Henry Ford Health System, which recently added Jackson-based Allegiance Health as its sixth hospital, recorded a 303 percent increase in operating income to $111.9 million for fiscal 2015 ending Dec. 31. Henry Ford's operating margin rose to 2.2 percent in 2015 from 0.5 percent the previous year.
"2015 was a good year for Henry Ford," said Edward Chadwick, Henry Ford's CFO. "We had growth in revenue; on the provider and plan side, we touched more patients."
Driving Henry Ford's 7 percent revenue growth to nearly $5.1 billion was its outpatient volume, which jumped by 5 percent compared with 1.1 percent for inpatient admissions, Chadwick said.
"We feel very good about that positive progress," Chadwick said.
For the first six months of fiscal 2016 ending Dec. 31, St. John Providence Health System, a five-hospital system based in Warren, improved its operating income 35 percent to $48.3 million. St. John's operating margin increased to 4.5 percent from 3 percent in 2014.
"Generally the year so far at the halfway point has been going relatively good," said Pat McGuire, St. John's CFO. "Volumes have been pretty moderate, and we are taking a lot of steps to try and get ready for more value-based reimbursement."
During the first six months, St. John's revenue jumped 11 percent, to $1.1 billion, while expenses grew 5 percent, to $1 billion.
"We are working on (reducing inpatient) readmissions, and population health (management) is keeping people as well (and out of the hospital) as possible," McGuire said.
During its first six months of fiscal 2016 ending March 31, McLaren Healthcare Corp., an 11-hospital system based in Flint, recorded a 115 percent increase in operating income to $65.3 million from $30.3 million. McLaren's operating margin rose to 3.6 percent from 1.8 percent in the prior half-year period.
"We began to see significant improvements last year and it carried over to this year," said David Mazurkiewicz, McLaren's CFO. "We have a substantial effort underway to manage expenses, and economies of scale have helped."
Mazurkiewicz said four McLaren subsidiaries did especially well, two of which are recent additions.
"Karmanos (Cancer Institute) and Port Huron (hospitals) showed significant improvement over the previous year. They are now getting the benefits of joining the system," he said, adding that hospitals in Lansing and Macomb also had above-average performances.
McLaren's bad debt and charity care dropped by 15 percent, to $54 million, for the first six months of 2016 from $63 million the same period of 2015.
"That has been a plus with Healthy Michigan," Mazurkiewicz said. "The sequestration cuts have not gone away, and Medicare continues to ratchet down reimbursements."
Despite drug costs increasing by 10 percent, McLaren was able to post record operating margins because it held expense increases per patient discharge flat, Mazurkiewicz said.
Two other health systems in Southeast Michigan — Ann Arbor-based St. Joseph Mercy Health System and for-profit Detroit Medical Center— did not report financial data to Crain's. Both are affiliated with larger health companies that did publicly report financial data.
St. Joseph Mercy is part of Novi-based Trinity Health, a Catholic system with 90 hospitals nationally, including eight in Michigan. For the first six months of fiscal 2016 ending Dec. 31, Trinity generated $38.2 million in operating profits for a 0.5 percent margin.
Trinity's operating income declined nearly five-fold from 2014 from $227.9 million for a 3.6 percent margin primarily because of several hospital acquisitions in Connecticut and New York and ongoing investments in population health initiatives, according to financial reports.
DMC is owned by Dallas-based Tenet Healthcare Corp., which operates 84 for-profit hospitals nationally. Tenet reported a 19 percent increase in operating income to $1.1 billion for fiscal 2015 ending Dec. 31. Tenet's operating margin increased to 5.9 percent from 5.6 percent the prior year.
After accounting for taxes, other charges and litigation costs, however, Tenet lost $140 million. As a result, Tenet was removed from Standard and Poor's 500, a blue-chip stock index. Tenet will move to S&P MidCap 400.
DMC officials have told Crain's previously that the seven-hospital system is ahead of projections.