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January 16, 2012

A Snapshot: Is Free Care in Minnesota What It Appears?

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With any luck, we’ve finally left the worst of the financial crash behind, and with it the financial challenge posed by large numbers of medically indigent patients.  A recent report from Minnesota’s hospital trade group underscores how bad things were for patients. It also suggests that the hospitals may not quite be as charitable as they claim.

According to the report, the level of free or discounted care provided by the state’s hospitals shot up 27 percent in 2010, driven largely by falling state coverage and rising unemployment.  The Minnesota Hospital Association said that state hospitals provided $226 million in charity care last year, along with $498.5 million expenses generated by Medicaid patients receiving discounted care that wasn’t reimbursed.

OK, let’s break this down. We’ve got, very broadly, $750 million in direct charity care expenses among 135 hospitals.  While I don’t know exactly what they grossed in 2010, we can be pretty sure it exceeds that figure by at least three or four orders of magnitude.

Sure, several million in charity care per hospital is enough to erode the slim margin most hospitals cope with year to year.  On the other hand, we know it’s not a simple matter of money in, expenses paid for charity care.  The accounting gets more complicated than seven-way chess, and let’s admit it, some of the numbers are a bit dicey at best.

Now, I’m not suggesting any individual hospital is gaming the system worse than others. But I am suggesting that if this is the best they can come up with, they’d better get cracking. Neither the IRS or Congress has much patience for charity care numbers that don’t add up, and municipalities (at least in Illinois) are getting into the “yank the tax exemption” act too.

Bottom line, you better keep your nose clean and those charity care numbers better be above board. If you’re not already, it’s time to avoid accounting tricks and play it straight.

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December 19, 2011

Small-Hospital Mergers A Signal That Crisis Is Upon Us

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If you’re wondering how healthy an industry is, look at how many smaller players are selling out. And if the smaller players are bailing like rats from the proverbial ship, consider that industry to be in crisis. That’s my theory, anyway. Read on and see if you agree.

You know, when I watched Community Health Systems and HCA and Tenet doing their little dances on the catwalk a few years ago, tendering offers and buying up sinking ships, I thought hey, that’s what big chains do. Didn’t register much.

One year ago, when I watched VC firm Cerberus Capital Management pick up Boston’s Caritas Christi chain, I saw signs of hospital desperation. After all, VC firms don’t sink their money into companies that offer a small, predictable return;  in this case, they acquired financially distressed properties with a very substantial upside.

So, what of this year?  Merger mania continues $7.3 billion of total healthcare-related M&A this year. (For more background, check out this hospital M&A list from business information provider Hoover’s. It’s been a wild year, and next year is likely to keep up the pace.

I’m not really surprised by the merger mess, and I doubt you are either. After all, hospitals have been running at minimal or even negative margins for many years, and now that health reform is breathing down everyone’s necks the pressure is climbing. The question is what this means for the industry.

Consider that one John Reiboldt of investment bank Coker Capital Advisers called the single stand-alone hospital a “concept of the past” at this year’s HIMSS event. Even if he’s wrong — or ahead of himself — the folks in his industry  are clearly poised to strike. And they’ll be making offers beleaguered single- and small-chain hospitals can’t refuse, capice?

December 5, 2011

Why Not Sell Those Medical Office Buildings?

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Back when the U.S. financial crisis was at its height, hospitals were searching desperately for assets which could keep them above water. And there was one type of asset which largely held its ground.  Though most other investments tanked, medical office buildings were a lone bright spot.

In 2008 and 2009, hospitals began unloading their MOBs, selling them to investors and leasing them back in an effort to keep the ground under their doctors’ feet. Commercial real estate players — notably real estate investment trusts — were only too happy to participate in these deals, as MOB properties had a rep for being nearly recession-proof.

By mid-2010 or so, MOB fever calmed down. But now, with the hospital industry’s health improving, it may be heating up again. If your hospital owns Class A medical office space occupied by affiliated doctors, you’re likely to get courted by real estate investors in the next few quarters.  (That’s my prediction, not some real estate exec’s, but the signs are there and MOB buyout momentum is growing again.

After all, consider the trends. Demand for medical office space is growing, boosted by rents hovering at about 5 percent below pre-recession levels, according to commercial real estate research firm CoStar Realty Information. Also, hospitals continue to need more space to house the practices they acquire, which will absorb any left-over vacancies and raise the value of the properties investors already own.

Not only that, there are long-term forces which are likely to keep demand high for MOBs. Commercial RE investors expect the coming growth in demand for outpatient services — which should hit 22 percent by 2019, according to McKinsey Global — to generate strong returns for medical property owners.

So, what does this mean for you?  Well, if you didn’t sell your MOBs a few years ago, you may have another chance. Bear in mind that investors are more interested in signing MOB deals with big chains like Tenet or HCA, as aggregating properties makes more sense than negotiating one deal at a time. But you’ve still got a special asset there.

Bottom line, if you have new (or newly-upgraded) medical office properties on your campus, consider whether they’d be more valuable as a lease-based tax deduction.  My guess is that you’ll be able to redeploy the cash more effectively in other areas of your operations — such as, say, building up your EMR.  And hey, you’re not really in the real estate business anyway, are you?

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November 21, 2011

Hospital Strategic Partnerships Avoid Mergers, But Create Other Pain Points

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This is one of those periods in health biz history when M&A looks especially attractive.  What CEO wouldn’t give a second thought to getting acquired and picking up a bundle of cash when they’re struggling to survive?

In fact, one attorney with a national health care law firm argues that that as many as 50 to 60 percent of doctors and hospitals are looking for partnership opportunities of late, in part because health reform encourages consolidation.

The question is whether the institutions can put aside their differences long enough to talk business — particularly if they have dueling missions (such as religious charity vs. profit). Not only that, it’s not clear whether partnerships will meet their needs for long, as we’ll discuss below.

Given their druthers, many institutions would prefer to stick it out on their own and do things their own way. And despite the urge to merge, many hospitals are keeping their independence through strategic partnerships, notes Becker’s Hospital Review.

It’s hard to argue that partnerships can have their advantages, as the Becker’s piece notes. Hospitals can cut overhead costs by sharing services and staffing, while expanding on their local reach and adding services they might lack.

Partners can also come together to shore up specific service lines without having to invest heavily on their own. That was the purpose of a recent agreement between Saint Vincent Health Center in Erie, PA and the Cleveland Clinic, which are teaming to further boost the reputation of their already high-profile organizations in cardiac and neurological services, according to the Becker’s piece.

And hospital partners can save big bucks by rolling out the all-but-mandatory EMR system together, too.  Not only do the hospitals save bucks on staffing and technical expenses, they also end up sharing clinical data by default. Ideally, they’ll provide higher-quality care and save money by avoiding duplicate services.

Hospital partnerships may make it easier to build an effective Accountable Care Organization, too. After all, it’s easier to share data and coordinate treatment if you already have a trusting relationship in place, particularly if you’re already integrated clinically.

That being said, partnership building comes with its own set of frustrations. Take last year’s relationship struck by Reston, WA-based Providence Health & Services and Seattle-based Swedish Health Services.

To get along, the two parties had to set up a complicated structure letting Providence’s 27 hospitals keep their Catholic mission, while the five Swedish hospitals stayed non-religious. The two will work together using the Epic EMR to work together on shared best practices and population health.

And that’s far from their biggest headache. Ultimately, hospitals won’t save the kind of money they’d like to save, nor build new business the way they’d hope to, without completing a real merger. At that point, things can get expensive and even more complicated, as individual IDNs or facilities fight to keep key partners of their strategy in place.

Meanwhile, the hospitals in question may find that merging doesn’t meet regulatory approval. Hey, look at what happened when ProMedica Health System of Toledo and nearby St. Luke’s Hospital decided to get hitched. The $1.7B ProMedica chain, has 11 hospitals in Ohio and Michigan, came riding to the financially-ailing St. Luke’s rescue with a $35 million investment in August 2010.

Since then, though, the FTC has cracked down hard on ProMedica, arguing that the deal unfairly monopolizes the Toledo market,  in particularly by raising its share of the inpatient obstetrical services market to 80 percent. (Hey, ask your friendly editor and I have to admit that the FTC’s argument has some merit.)

So, where can hospitals turn if they want to thread their way through the current hospital business climate?

Well, at least one model — promoted by organizations like Paradigm Physician Partners and the LHP Hospital Group — have rolled out a model in which, as privately held companies, they form joint ventures with and sink capital into non-profit hospitals and health systems. LHP, which holds joint interest in some or all of the hospital’s operations through an LLC,  recently closed a deal with Pocatello, ID-based Portneuf Medical Center.

I predict that hospitals will find new ways to take in investment without giving up equity or their non-profit status. If new models pop up on my viewscreen I’ll let you know — I think this’ll be a hot new transaction strategy.

 

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November 14, 2011

Hospitals play unfair games with Medicare observation status

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Most hospital visitors don’t care a whole lot whether they’re classed as inpatients or outpatients  — unless it affects the size of their bill. But lately, many patients are getting hit with unexpected fees after spending days in a hospital, thanks to tricks hospitals are playing in an effort to lower their readmission rate numbers, a newly-filed lawsuit contends.

These days, hospitals are under intense pressure to lower readmission rates, as such rates figure into their ratings on various types of quality scales.  In some cases, of course, they have no direct control of this number, as readmissions often have far more to do with the care they receive from community physicians and their willingness to comply with discharge instructions.

But ever-resourceful administrators have found a loophole that allows them to rejigger the admissions numbers. Under Medicare rules, they’re allowed to keep patients on “observation status,” deliver care and let patients go without ever classing them as inpatients. All of which might be well and good, except that if patients are in a hospital for days, they rack up a big bill — one they’re expected to pay far more of if the visit is billed as outpatient care under Medicare Part B.

Even more delightful for these patients, the fact that they haven’t logged three or more “real” inpatient days means that Medicare won’t pay for follow-up in a skilled nursing facility after discharge. So seniors either do without, or end up having the state pay through Medicaid.

Nice way to look out for patients, guys. Being old and sick and scared isn’t bad enough; now seniors have to wonder if their hospital costs are paid for even with Medicare coverage in place.

With this kind of mumblety-peg becoming fairly common, a consumer group called Center for Medicare Advocacy has filed a lawsuit to call a halt to the fun. The group is asking CMS to simply end observation status as a billable category.

While I sympathize with hospitals to some degree, who are also hoping to dodge scrutiny from the RECs by avoiding inpatient claim reviews, setting up seniors for high costs by playing unfair games is bad for you, the industry and the patient. Cut it out.

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September 19, 2011

$1M+ pay for non-profit CEOs still an embarassment

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When a not for-profit hospital recruits a CEO, they certainly need to bear in mind the salaries their candidate might be offered by a for-profit rivals, as well as their not for-profit competitors. However, does that justify a million or more dollars a year in compensation, even when the not for-profit is losing money or laying off staff?

This question has been embarrassing U.S. non-profits for quite some time, but of course, there’s no simple answer. The non-profits continue to argue that they can’t attract the talent they need without handing out top-dollar comp packages. Critics, meanwhile, say there’s no excuse for paying Joe CEO millions if the hospital is supposed to be dedicated to the less-fortunate.

To date, non-profits have been winning the battle, as megabucks salaries are still on the table in most markets. (Apparently, the critics haven’t had the juice to force industry change on the non-profit giants.) Still, regional controversies over public and non-profit hosp ital CEO pay flare up from time to time.

In Atlanta, for example, the Atlanta Journal-Constitution recently shined a light on the hefty compensation packages awarded to CEOs of several non-profit facilities.

As the paper notes, twelve of the 15 acute care hospital systems in metro Atlanta are exempt from paying any taxes on more than $2.6 billion worth of property and equipment. Unlike their for-profit brethren, the non-profit systems are spared millions in sales taxes and income taxes.

According to the AJC, at least five CEOs of non-profit hospitals or health systems made more than $1 million in the fiscal year ending in 2009.  Take Edward Bonn of Southern Regional Health System, which operates Southern Regional Medical Center and two affiliated facilities. Not only did Bonn make $2,610,175 in 2009, he got $421,822 plus $2.2 million from a retirement plan when he left the plan that year.

When CEOs have salaries rivaling corporate executives, they certainly don’t come across as being charitable, says a former state Department of community Health commissioner.  Says Russ Toal, now a professor of public health at Georgia Southern University: “I think, it makes a statement about what their priorities are.”

The problem isn’t limited to Georgia, of course. In Texas, for example, state Sen. Rodney Ellis is pushing for tougher enforcement of the state charity care requirements for not-for-profits hospitals. “If you get a tax exemption, you ought to be able to justify why,” Ellis told the AJC.

But big cities with large underserved populations (and financially shaky public institutions like Atlanta’s Grady Memorial, the nation’s 5th largest public hospital) will continue to get the most press. When a struggling metro can hardly care for the poorest and sickest patients, those big, bad salaries look even worse.

Let’s face it, though:  while non-profit CEOs’ fat paychecks will continue to get slammed for the foreseeable future, nobody’s ready to slap strict limits on those paychecks. So if you’re bothered by reading about non-profit hospital CEOs taking home $1 million plus a year, you’d probably better turn to the sports pages.

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August 29, 2011

FTC: This Merger Looks So Good, It Has To Be Illegal

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If you’re as cynical as I am, it’s not hard to take a certain amusement in the goings-on in Toledo over the merger between an aggressive for-profit hospital chain and a suburban not-for-profit.

Over the past few months, the Federal Trade Commission seems to have developed a passionate interest in the merger between a formerly Lutheran-owned non-profit, St. Luke’s Hospital of Maumee, OH and ProMedica Health System of Toledo. ProMedica, which owns 11 hospitals in Ohio and Michigan — including four in the Toledo metro — is a swaggering giant with $1.7 billion in annual revenue.

What a sweet deal it was for ProMedica. According to Moody’s, the facility had very little debt ($8.3 million) and 412 percent cash-to-debt coverage as of November 30, 2009 (recently enough to matter).

Sure, as of early 2010 St. Luke’s had an operating cash flow deficiency of -2.0 percent and -9.8 percent operating margin, and at least according to Moody’s, had cut some cut-rate contracts with payors accounting for 22 percent of its operating revenues.

On the other hand, its miserably weak competitive market position which, as Moody’s noted in its downgrade report, included clashes with ProMedica, went away with the stroke of a pen when the two consummated their agreement. ProMedica sweeps in with its Aa3-rated borrowing capacity, invests a relatively slim $35 million and picks up the 10 percent market share SLH held at the time. I don’t know what 10 percent of the market is worth, but that has to be a fire sale.

Dig this if you can, cats and kittens:  According to the FTC,  the deal increases ProMedica’s market share in Toledo to 58 percent of inpatient services and (get this) 80 percent of high-margin inpatient OB services. Wow… Small wonder the FTC smells a rat.

Of course, in the sort of excess of confidence you always see in these deals, ProMedica’s executives are pretending the deal was good for the public and stuff.  I don’t know about you, but I find the following comment (made by ProMedica CEO Randy Oostra to the New York Times) to be preposterous:

“We could coordinate care,” Mr. Oostra said. “We could improve quality at St. Luke’s by adopting electronic health records and using clinical protocols to standardize the delivery of care. But the F.T.C. has stopped us in our tracks.” 

OK, let me get this straight, Mr. Oostra. You could only connect with St. Luke’s by buying it and forcing your EHR down its throat (after all, we know you’re not going to put St. Luke’s on Cerner if you use Epic)? You’re buying a hospital with tremendous upside largely because you think you can standardize care — because that will, of course, increase effectiveness and lower prices?  Oh, and as far as sharing data and coordinating care: have you ever heard of a health information network? Or an Accountable Care Organization?

Really, sir, if you want to impress the FTC with the public benefits of your transaction, you’re going to have to try a little harder. If you’re already phoning it in, to the Times no less, you’re not just arrogant, you’re stupid.

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August 22, 2011

Another safety-net hospital on life support: Miami’s Jackson Memorial on its last legs?

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You know, no matter many how many times  you watch it happen, it’s always an ugly spectacle.

When a safety-net hospital goes under because, well, being a safety net costs a ton, the poor are left with less than nothing. Worse, along the way, the hospital often slips from being an inelegant but functional resource to a nasty, scary place you wouldn’t send your worst enemy.

I was truly sorry to read that Jackson Memorial Hospital of Miami — a sprawling, 1,550-bed campus which still houses outstanding programs like the Bascom Palmer Eye Institute and the Ryder Trauma Center — seems to be moving rapidly from quick to dead.

The giant public entity, which serves as the primary teaching hospital for the University of Miami Miller School of Medicine, has faced plenty of controversy of its time, including accusations that some of its poor clientele were allowed to die for lack of followup care. That, of course, is an extremely serious matter.

But for most of its life, Jackson did at least offer the roughly 650,000 uninsured of Miami-Dade county an alternative to going into hock in the pricey EDs run by its competitors. It went through a colorful string of outspoken leaders, none of which seemed to share the same vision for the place, faced lawsuits and immigration issues and politics galore, but continued to stay afloat.

Those days, it seems, are over. According to a recent Miami Herald article, the Jackson Health System lost $337 million over two years, despite taking in $350 million a year from sales and property tax revenue alone.

This week, the system announced that it was hiring new leaders to step into the top administrative roles at JHS.  But in a system where its own employees refuse to get their care on site, I get the feeling that “changing deck chairs on the Titanic” covers things. What a shame.

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August 21, 2011

Illinois hospitals shocked, I tell you, shocked at losing non-profit status

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For years now, legislators have been threatening and posturing over the issue of just how much charity care a non-profit hospital needs to provide to maintain their tax-free status.

In prior years, Sen. Chuck Grassley (R-Iowa) struck fear in the hearts of hospital execs when he toyed with pushing through rules demanding that non-profits dedicate 5 percent of revenues to charity care. To my knowledge, the issue isn’t in play on the Hill right now, though it isn’t dead either.

Since angry comments by Grassley haven’t been making headlines for some time, charity hospitals must have that they were pretty much in in the clear for the moment.

Imagine the dismay a trio of Illinois non-profits must have felt with the state Department of Revenue yanked their property tax exemptions earlier this week.

The ruling, which affects Prentice Women’s at Northwestern Memorial Hospital in Chicago; Edward Hospital in Naperville and Decatur Memorial Hospital, found that the properties weren’t being used for charitable purposes. If upheld, the ruling could cost the hospitals millions in property taxes.

The decision follows another slam in March 2010, when the state Supreme Court upheld a decision by the Department of Revenue rescinding the non-profit status of a hospital which spent 0.7 percent on charity care.

According to hospital records,  Northwestern spent 1.85 percent, Edward 1.04 percent and Decature 0.96 percent on charity care.

You know, if you’d been paying attention, guys, the pattern is pretty clear. Spend much below 2 percent of revenues on charity care,  you have a target on your head. Maybe you won’t get targeted now, but have no doubt that next time a politician gets hot and bothered over charity care your name will pop up.

And if you think you can beat the rap, consider the Provena Covenant case. The revenue department killed hospital’s property tax exemption in 2004, after noting that it had provide charity care to less than one-half of 1 percent of patients served in 2002. Come on, now.  Even my eight year old could have seen that one coming.

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May 2, 2011

Takes from Twitter: Intriguing hospital tidbits

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Here’s some hospital updates from the ever-flowing well of Twitterchat.  I’m not endorsing the tweeters in question, but I was intrigued by these tidbits:

@EFS_Consultants Medical Wonder: Meet The CEO Who Rebuilt A Crumbling California Hospital http://ow.ly/1csdwz

@Stanford: HP pledges $25 million to help Lucile Packard Children’s Hospital carry out a major expansion and conduct new research: http://bit.ly/iWDh0K

@nicolebrown25  Lawmakers weigh report on New Orleans hospital: The state has committed $300 million in construction money http://bit.ly/ii0YCC

@anesthesiology2 10 Recent Stark, False Claims and Kickback Lawsuits Involving Hospitals http://bit.ly/kCyODY

@TheAuditGroup Four Hospital Action Items for 2011 http://t.co/qB1lRvs

@Voicemed: 12 Best Practices for Making Hospitals Great Places to Work http://t.co/qFoKPKu

@HospitalLayoffs #Hospital #Jobs Hospital Mass Layoffs Dropped Slightly in First Quarter http://ow.ly/1crPlh

 

Gotmore info to share?  Tweet me at @katherinerourke and I’ll take a look.

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