The Dose

Welcome to The Dose, which tackles the finances behind local health care and life sciences and points to the most interesting national analysis. Your host is J.K. Wall.

Health Care & Life Sciences / Life Science & Biotech

Medic! Early signal shows hospital profits plunged in 2013

March 24, 2014

Note: This post has been edited to reflect 2012 gains recorded by Franciscan Alliance that were not repeated in 2013 and were not reported in Franciscan's 2013 financial statement. When those 2012 gains are included in the analysis below, the year-to-year change in operating profit is smaller than I first reported. My apologies for the oversight. -- J.K. Wall

While hospitals were laying off hundreds of workers last summer and fall, it was a little difficult to see why.

Their 2012 financials were strong, as I noted on Friday.

But we’re finally starting to get a picture of exactly what happened to hospitals last year.

And it isn’t pretty.

Franciscan Alliance, always the first to report its unaudited financial results, put out 2013 numbers that show a real decline in profit from operations of 58 percent.

Ouch!

Here’s how the numbers break down:

Franciscan, which operates 13 hospitals in Indiana and Illinois, posted an operating gain of $37.9 million.

That number is complicated by a net gain of $23.2 million from state program called the Hospital Assessment Fee.

In its 2012 audited financial statements, Franciscan recorded a net gain from the Hospital Assessment Fee program of $58.2 million.

To make the years comparable, I excluded those HAF gains from both years. That yields net operating gain in 2013 of $14.7 million, down from a net gain in 2012 of $21.6 million.

Yet there’s another issue to deal with. In 2012, Franciscan recorded a $30 million accounting charge because it decided the value of its buildings was less than it previously thought. So that’s not cash it actually spent, just a charge on paper.

Franciscan recorded no such “impairment” charges in 2013.

So if we exclude that 2012 impairment charge and the gains from the HAF program in both years, we find that Franciscan’s operating profit fell from $51.6 million in 2012 to $14.7 million last year.

But we're still not done. In 2012, Franciscan received a $19.1 million settlement payment from the federal Medicare program related to the years 2007-2011. There was no such payment in 2013, so we need to substract that payment form the 2012 profit totals. That reduces the 2012 operating profit to $32.5 million.

Also, Franciscan received $23.1 million in federal Disproportionate Share funding in 2013--which is money paid to hospitals that serve large numbers of Medicaid and Medicare patients. In 2012, Franciscan received only $19.7 million in so-called DSH funding. So I reduced Franciscan's 2013 operating profit by the difference between those two figures, or $3.4 million. That takes Franciscan's 2013 operating profit down to $11.3 million.

And finally, Franciscan records on its financial statements gains from its equity stake in medical businesses that it does not control (and, therefore, does not consolidate with the rest of its finanices). Those gains were $2.2 million smaller in 2013 than in 2012. So to reflect that difference, I have bumped up Franciscan's 2013 pofit by $2.2 million to account for that difference. So that bumps Franciscan's 2013 operating profit back up to $13.5 million

At long last, that gives us adjusted operating profits of $32.5 million in 2012, falling to $13.5 million in 2013.

That’s a 58 percent decline.

As I said, Ouch!

The numbers fell so sharply for two main reasons:

1.    Franciscan saw fewer patients for shorter amounts of time. Total discharges last year fell by nearly 9 percent to just more than 82,000. The total days patients were in the hospital fell nearly 10 percent last year to just below 373,000. However, growth in other parts of its business appeared to offset those inpatient declines, as total patient revenue fell by only 1.7 percent to $2.32 billion.

2.    Despite cutting 925 positions last year, Franciscan still spent more on workers--$48 million more, in fact, an increase of 3.6 percent over the previous year. That money went to the rising number of employed physicians, more staff needed to implement electronic medical records and a new billing system known as ICD-10, raises and increased pension costs.

I’m curious if Franciscan’s results are peculiar to it, or were common across all hospitals. At the end of the third quarter, things weren’t looking good, although many hospitals were cutting more out of fear of what’s to come than pain they were already feeling.

We should get a peak at Indiana University Health’s 2013 finances before the end of this month, with Community Health Network’s financial results probably coming in May.

I’ll be interested to see what they show.

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