Medic! Early signal shows hospital profits plunged in 2013

March 24, 2014
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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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  • No Surprise
    As an insider, it's interesting to watch people speculate about healthcare (and wonder if they should be paid just to do so). Hospital income is going down across the nation as utilization decreases nationally and government funding cuts take effect (to say nothing of pressure from for-profit insurance companies). Hospitals get the pinch with continued Medicare/Medicaid cuts, the sequester, healthcare reform and more. With an uncertain future, hospitals are positioning themselves to bank money now to survive the future. This process has taken place for the past several years. While hospitals have been made out to be evil organizations, they continue to invest in communities, employee thousands across the state and nationally, as well as to reinvest in important and expensive patient care initiatives to improve safety, quality and satisfaction. Certainly, hospitals must become more efficient, but the eventuality of reduced profits should come as no surprise to anyone. It's time we stop being so critical of hospitals or doctors and ask "what has the insurance company done for you lately, or ever?"
    • CEO compensation
      With all of reorganization, cutting, slashing and downsizing that has occurred at St Vincent, St Francis, Community Health Network and I U I have yet to read or hear about the executives at these hospitals taking a pay cut. Why?
      • Agree, Indy Guy
        I agree with you Indy Guy. Well said. Let's focus a little more on the for-profit insurance companies. Also, JK Wall, why do you so rarely discuss Medicaid in this blog? It greatly impacts urban hospitals. Especially as Pence has yet to expand it.
      • In defense of JK
        He has discussed both insurers and Medicaid before in the blog. And truth be told, since Pence and Sebelius are apparently still negotiating on expanding HIP and/or Medicaid, there isn't much to be said. If the two sides reach a deal, or if they quit talking, then we would have some news. I agree that I would like to see more in depth analysis of insurers, but it's probably true that insurers, unlike hospitals, aren't required to release much financial data, so it would be difficult to analyze them in the same way the hospitals have been.
      • Execs
        Susan, you ask "I have yet to read or hear about the executives at these hospitals taking a pay cut. Why?" Execs are being cut just the same (at least at St. V's). I don't know if these positions are being eliminated, but my suspicion is that if they are being replaced, it is at a lower compensation.
      • Indy Guy is right
        I totally agree with Indy Guy. While hospitals and doctors haven't been perfect, they are not nearly the big bad gorilla that health insurance companies are. If a company can afford to build a skyscraper in a city or have suites at professional sport venues, they're probably doing more than well. How many skyscrapers/suites are there with hospital names vs. insurance companies?!
      • Non Profit???
        it is interesting that this article is about reduced profits for a not-for-profit organization. These so-called nonprofits benefit from their status while raking in huge profits every year. They advertise and operate like any other business, but do not pay taxes and get free mail service. If they want to cut costs, why not cut back on the advertising?
      • Health Care Needs to Change - But it Hurts
        Being in health care for the last 15 years, I believe that every hospital that wants to survive health care reform is predicting a similar financial showing as Franciscan (or even worse) for 2013 and the next couple of years. While I clearly see that we're getting back to doing business the "right" way - with our patient's being at the center of that focus – improving the patient experience, improving the health of our communities, and reducing the per capita cost of care - it’s going to be a bumpy couple of years. While hospitals are being asked to change their models of care and be accountable like never before, at the same time we’re experiencing workforce shortages, increased numbers of insured folks, cuts in Medicare/Medicaid, meaningful use criteria, penalties for failing to meet quality outcomes, and the sequester. It’s created a perfect storm, but one that hospitals and health care in general will weather. Health care workers and their patients should get ready for the ride. It will be an exciting time with a lot of changes, so hold on TIGHT and have the spirit to LET GO!
      • Free Mail?
        How sure are we that non-profit hospitals get free mail service?

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