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Building binge hasn't crimped hospital profits

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Indianapolis-area hospitals spent billions on construction in the past decade and increasingly tried to poach patients from one another’s territories. Yet last year—one of the worst economically in recent history—21 of 26 hospitals still were able to show operating profits.

It’s a pretty good demonstration of Roemer’s Law of health care demand: Use of medical services will increase to match the available capacity of medical facilities. Or, said another way, if hospitals build it, patients will come.

Yet unlike in most other industries, providers of medical services do not have to lower their prices in order to entice this rise in demand. Anyone not living under a rock the past decade knows that the price for medical services has not gone down in spite of increased competition.

In a 2006 report, analysts at Tennessee-based market research firm HealthLeaders-InterStudy pinned the major cause of Indianapolis’ building boom on the phase-out of state regulation on hospital building. The so-called certificate-of-need process required health care facilities to demonstrate an unmet need their building project would address.

"A decade ago, Indianapolis-area hospitals stuck to their territories, and many counties owned a hospital that was the sole health care provider for their area," senior analyst Patrick Powers said in the report. "The state's repeal of certificate-of-need requirements in 1994, combined with recent strong population growth in Hendricks, Hamilton, and other formerly rural areas, has encouraged central Indiana hospital networks to build new facilities outside their traditional patient markets."

Hospital growth continued rabidly until the finacnial meltdown two years ago, with the poster child for the phenomenon being Exit 10 off Interstate 69, where Community Health Network had a medical office building, and then St. Vincent Health opened a free-standing emergency room, and now Clarian Health is building a full-service hospital. Each facility is within a stone’s throw of the other.

Those three hospital systems are all doing fine financially. However, Community and St. Vincent both saw their flagship hospitals lose large amounts of money in 2009.

St. Vincent Indianapolis lost $46.1 million, an operating margin of  -2.2 percent. Community East lost a whopping $89.8 million, an operating margin of  -11.3 percent.

The other two local hospitals to lose money last year were St. Francis Beech Grove Hospital and Wishard Memorial Hospital.

(Not included in this analysis were long-term care, psychiatric, or veterans’ hospitals. All data come from the hospitals’ reports to the federal Medicare program. Operating margins are calculated by dividing net gain for the year by total revenue from patient-care operations.)

Wishard, which is the safety net hospital for Marion County, lost $18.7 million on its operations in 2009, a margin of -1.8 percent. St. Francis’ Beech Grove campus recorded red ink of $33.3 million, or an operating margin of -6.5 percent.

But St. Francis is really the big winner among Indianapolis’ four major hospital systems. Its campuses in Indianapolis and Mooresville had great years, producing combined profits of more than $106 million and handsome margins.

The Mooresville hospital was edged out by the Indiana Orthopaedic Hospital for most profitable in the region. The Orthopaedic Hospital had an operating margin of 17.2 percent, compared with St. Francis Mooresville’s margin of 16.9 percent.

The county-owned hospitals surrounding Indianapolis all did fine in 2009, led by Major Hospital in Shelbyville: It posted a gain of $11.9 million, an operating margin of 6.7 percent.

Here is a list of all 26 local hospitals, ranked in order of their operating margins:

1.    Indiana Orthopaedic: 17.2 percent
2.    St. Francis Mooresville: 16.9 percent
3.    St. Vincent Carmel: 9.9 percent
4.    St. Francis Indianapolis: 8.6 percent
5.    St. Vincent Heart: 7.0 percent
6.    Major: 6.7 percent
7.    Hancock Regional: 6.5 percent
8.    Hendricks Regional: 5.7 percent
9.    Morgan: 4.0 percent
10.    Community North: 3.7 percent
11.    Clarian West: 3.3 percent
12.    Community Anderson: 3.3 percent
13.    Riverview: 3.3 percent
14.    Witham: 2.9 percent
15.    Clarian North: 2.2 percent
16.    Community South: 2.2 percent
17.    Methodist-IU-Riley: 2.0 percent
18.    Johnson Memorial: 1.2 percent
19.    Westview: 1.1 percent
20.    Indiana Heart: 1.1 percent
21.    Saint John’s-Anderson: 0.6 percent
22.    Wishard: -1.8 percent
23.    St. Vincent Indianapolis: -2.2 percent
24.    Rehabilitation Hospital of Indiana: -2.7 percent
25.    St. Francis Beech Grove: -6.5 percent
26.    Community East: -11.3 percent

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  • Six Sigma?
    I'm curious if any of these institutions have considered six sigma methodologies to maintain or even increase profit while streamlining their processes to improve more than just the bottom line.
  • Pack of lies
    Yes, I was laid off 11/8/2010 after a 30 year career because Community East is so badly run. My situation was age descrimination pure and simple. That fancy fence must have cost close to 2 million dollars. And I heard the place lost $98 million dollars. They are plucking out the older baby boomers for layoff. It should be against the law what this hospital is doing. It needs to close!!!
  • Too Much...
    Indy has overbuilt its medical empire in anticipation of capturing the baby boomers that now find themselves without jobs or insurance.Those of us waiting in the wings to go back to work in the healthcare field now find that most facilities are operating in the red and not hiring.Sort of a catch 22, where is Henry Ford when you need him?
  • Truth
    well as an employee i can tell you community health network is telling us a different story. We where told that we are in the red, so they hire wellsprings to do the job of the co,s , they cut hours/wages, thin staff, while spending gobs of money on nonessential things, example flat screen TV's x two in all patient rooms, original paintings for the waiting rooms, etc.. I was against socialized medicine, but after dealing with this corrupted organization it would be a godsend.
  • Dear Anonymous Indy
    ...if you believe the ins. companies operate on only 3-5% profit margin then you need to check your pipe cuz that's some funny stuff yer smokin'...and if you noticed after the top 5 hospitals the rest fell back to 6% or under. And it's not hospitals that deny care for patients, it's insurance companies which are ALL about the profit...persoanlly I've been denied twice in last couple years for treatment for cancer and had to appeal each time, they just deny claims out-of-hand knowing that a certain percentage of folks will NOT appeal! Damn right they're a bunch of freakin' criminals and NO other industrialized nation allows their health care system to be run by insurers, and they ALL provide better care for almost half the cost, so do some research before you talk out of ignorance. http://www2.indystar.com/articles/2/135877-3402-031.html

    http://hcrenewal.blogspot.com/2010/04/pay-for-hypocrisy-for-health-insurance.html
  • Well said...
    ...and right on Julia, altho I ahve a friend who works in accounting for a local Catholic hospital 'non-profit' hopsital and he assures me they do have a bottom line financial goal, they just don't call it 'profit'!
  • Compare for-profit to non-profit
    The real story is where do the profits go? Most hospitals are non-profit and their excess income is used to make necessary improvements to the facility or to add to the coffers to get them through times that aren't so good. Their goal is to provide health care. For-profit hospitals and 99% of health insurers (not counting Medicare/Medicaid and the odd nonprofit health insurer) distribute profits to shareholders, increase salaries, give bonuses, etc. Their goal is to make profit, however they can--by rationing payments, decreasing staff, and acquiring other companies.

    See the difference?
  • Profit Margins?
    So, the health insurance companies' profit margins are in the 3-5% range at best, and the hospitals top out at +15%, but health insurers are the evildoers that made health care reform necessary? Clarian North and the remodeled Community North both look like opulent hotels.
    • Lost Revenue
      Many hospital have started using Six Sigma to save money. If this is the case why is there so much lost revenue? www.practicalcostreduction.com

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