Financially fit IU Health still hoarding cash for fear of change

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Indiana University Health is in better financial shape than it has been in years.

The Indianapolis-based hospital system enjoyed profit from operations last year of $795.3 million, more than double its year-earlier figure, according to year-end financial results released to bondholders Friday.

Even after adjusting for one-time differences between the two years, IU Health’s operating profits still shot up 75 percent in 2014, to nearly $608 million.

That helped push IU Health's unrestricted cash and investments at the end of the year to a whopping $3.6 billion, up from about $3 billion the year before.

The rise in profits occurred in spite of flat revenue. IU Health brought in $5.7 billion, up by $480 million from the previous year. But most of that increase came because of extra, one-time payments from the state Medicaid program.

Excluding that and other differences between the two years, IU Health’s revenue would have risen just $95 million, an increase of 1.7 percent over the previous year.

IU Health, which is in the midst of chopping out $1 billion of operating expenses by 2017, grew its expenses just 0.8 percent in 2014 over the previous year. IU Health actually spent $134 million less on salaries, wages and benefits, due to its 2013 layoffs and other cuts in 2014 that have reduced its total full-time equivalent staff by nearly 2,000 since the end of 2013.

Those results were encouraging to analysts at Fitch Ratings, which issued a report on Friday about $278 million in bonds IU Health has filed to sell to refinance older debt.

Fitch analysts noted that a string of acquisitions and new hospital building by IU Health caused its debt load to peak in 2008. But it has made progress paying that down, reducing its ratio of debt to capital from 51.6 percent in 2008 to 26.7 percent at the end of 2014.

“A significant portion of IU Health's expansion was funded through debt issuance resulting in the increased leverage in fiscal 2008,” wrote Fitch analysts Adam Kates and Jennifer Kim. But now, they added, "Operating profitability has remained consistently strong due to a combination of expense management initiatives, including consolidation of services subsequent to the system's statewide expansion and the enactment of Indiana's Medicaid hospital assessment fee (HAF) program, which combined to offset declining inpatient volumes in fiscal 2013 and fiscal 2014."

The Fitch analysts remained cautious, however, as IU Health is contemplating building a new hospital in Bloomington and possibly building a new hospital in Indianapolis to replace its Methodist and University hospitals.

IU Health’s leaders also remain concerned that a Medicaid assessment fee from in Indiana may not remain in place past its current expiration date in 2018. They also noted that special payments from the federal Medicare and Medicaid programs—known as disproportionate share and upper payment limit payments—could go down in the future. And they fear reductions in payment from various health plans.

In comments filed with their 2014 financial results, IU Health’s leaders described their expense reductions this way: “As the healthcare landscape continues to change, management has taken many steps to ensure the Indiana University Health System can continue to provide a top level of care to patients into the future.”

“Moreover,” IU Health leaders said, “management has taken these actions as they anticipate and plan for significant capital expenditures within the next few years.”

IU Health’s 2014 revenue was pushed down by a 4.1 percent decline in inpatient visits and a 3 percent decline in surgeries. Those declines lessened as the year went on, with IU Health actually seeing growth in the month of December.

“Management believes the declines in inpatient volumes and related revenues are a reflection of the current industrywide trends in which health care systems across the nation are experiencing shifts from inpatient to outpatient as well as declining inpatient utilization.”

But three factors counteracted the declines in patient visits. IU Health saw a rise in physician office visits, helped in part by its heavy advertising for same-day appointments. Also, IU Health’s percentage of revenue coming from self-pay patients declined from 5.1 percent in the fourth quarter of 2013 to 4.0 percent in the fourth quarter of 2014, as the hospital system helped uninsured patients sign up for Medicaid and health insurance plans offered on the Obamacare exchanges.

IU Health also worked harder to obtain pre-authorization from insurance plans before performing surgeries.

Those efforts helped it cut its total uncollectible accounts by 13 percent during the year, to just less than $300 million.

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