Building binge hasn’t crimped hospital profits

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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