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Flying high
By KRIS HUNDLEY © St. Petersburg Times, published April 15, 2001
Hospitals, which complained about Medicare cuts and tight-fisted managed care companies through most of the nation's boom years, are showing improved finances as other industries are taking a turn for the worse. The prescription? Improved reimbursements from Medicare and managed care and more patients, thanks to aging baby boomers. The outcome: better margins. Consider: Tenet Healthcare Corp., the nation's second-largest hospital chain, said earnings from operations were up 30 percent in the quarter ended Feb. 28. Health Management Associates Inc., which owns hospitals in Spring Hill and Brooksville, had a 17 percent increase in net income for the three months ended Dec. 31. Even HCA-The Healthcare Co., the nation's largest hospital chain with nine hospitals in the Tampa Bay area, showed solid operating results last year despite being hit with a landmark $840-million government fine. Excluding such one-time charges, HCA's earnings per share were up 24 percent for the year. Local non-profits showed improvement as well. Bayfront Medical Center in St. Petersburg posted a profit of $4.9-million last year, up from a $600,000 surplus in 1999 and compared with a loss of $6.6-million in 1998. It's on track to have another $4-million surplus this year. Even beleaguered Tampa General Hospital, which had been losing money since 1997, has a $4.3-million surplus in the first five months of its fiscal year. There still are plenty of facilities that are on shaky financial grounds. Nursing shortages, possible cuts in Medicaid and the growing number of uninsured threaten to push these institutions over the edge. Even hospitals that are profitable have made severe staffing cuts, which some think have lowered the quality of care. And hospital lobbyists, who have spent the past three years hammering Congress for more money, are loath to admit the tide may have turned in their favor. But the improved financial performance of most for-profit hospital chains as well as many non-profits in the past year is stunning considering their recent track record. Analyst Nancy Weaver has followed publicly traded hospital stocks for the past eight years, as the companies suffered through deep Medicare cuts and messy government investigations. She's nearly giddy as she looks at the group now. "There's been a dramatic improvement in profitability in the last year," said Weaver, an analyst with Stephens Inc. in Little Rock, Ark. "Hospitals have gone from literally one of the worst environments to one of the best." Happy days are here again for many hospitals, thanks to the industry's successful lobbying efforts in Congress, hardball negotiations with HMOs and dramatic restructuring efforts in the late 1990s. What the Balanced Budget Act (BBA) of 1997 cut in Medicare reimbursements, two relief packages have partly restored. The first round of relief, with about $6.5-billion for hospitals, went into effect in October; this month, hospitals will feel the impact of the second round, which gives $11.5-billion to hospitals over the next five years. Even better news: Medicare spending caps imposed by the BBA expire at the end of 2002. And there seem to be few threats from the new administration. President Bush's budget proposal in February was the first in 15 years that included no cuts in Medicare spending. In addition to having Washington on its side, the hospital industry has been pushing negotiations with managed care companies to the brink and often winning sizable rate increases. "We've come through a cycle over the last 15 years of decreased pricing on commercial business," said analyst Weaver, who traces the turnaround to HCA's face-off with Humana in Florida in 1998, which resulted in unheard of double-digit rate increases for the hospital chain. "That was the shot across the bow. It was the first major contract where for-profits led the industry in showing that hospitals have more pricing power than they realized." The lesson wasn't lost on non-profits. Last year, BayCare Health System Inc., a network of seven local non-profit hospitals, won a highly publicized contract showdown with Blue Cross and Blue Shield of Florida. Three months later, HCA did the same, winning financial concessions from the state's largest health insurer. In its annual report for 2000, HCA said it had received average price increases of 5 percent to 6 percent on its managed care contracts. As hospitals have improved their revenue stream, with higher reimbursements from government and commercial payers, they've also sliced the expense side of the ledger. Responding to the shock therapy of the BBA, which went into effect in 1998, hospitals were forced to take a hard look at operations. Affiliated businesses such as home health, which had been moneymakers under previous Medicare rules, quickly were jettisoned by many for-profit chains. Hospitals that once bought up doctors' practices, expecting them to be cash cows, let the contracts expire when the opposite proved true. And everywhere, across the board, hospitals reappraised the productivity of their employees and began making cuts. At Bayfront Medical Center, about 200 positions were cut in mid-1999 after the hospital lost $6.6-million the previous year. Chief financial officer Bob Thornton said the initiative, which instituted new productivity standards in all departments, played a big role in the hospital's financial turnaround. "Everything is still driven by volume: As the volume of patients changes, the amount of manpower changes proportionately," he said. "But we're trying to control our labor costs as much as possible." Labor costs, specifically nursing costs in the wake of a nationwide shortage of qualified nurses, loom as the biggest obstacle as hospitals watch their margins. American Hospital Association spokesman Rick Wade said that a Congress tired of hearing about BBA relief will hear more about increasing Medicare reimbursements to allow for higher nurses' pay. "The next issue for us is the work force shortage and how federal payment levels affect that," Wade said. "Do they reflect the pay hospitals need to offer to recruit and retain the best people in the toughest places?" Nor is Wade willing to celebrate a financial turnaround for the hospital industry anytime soon. In 1999, one-third of the hospitals nationwide were losing money, according to state and national hospital trade associations. "The worst of the BBA is over, but when you look at the collateral damage, the relief bills will not come anywhere near repairing that," he said. Nor should the improved profitability of for-profit chains, which account for 15 percent of the nation's 5,000 hospitals, suggest that all hospitals are doing better. "That would be erroneous," Wade said. Other forces threatening hospitals are the rising cost of pharmaceuticals and high-tech medical technology, as well as an economic slowdown that may push more people into the ranks of the uninsured. The market downturn also has affected many non-profit hospitals' return on investments, deflating a cushion that softened the blow in the late 1990s. "I know of no hospital that positions its future on what its investments will do," Wade said. "But in the past when I've asked hospital executives who would be in the red if it weren't for philanthropic and investment income, many hands have gone up." Though Wade paints a picture of financial uncertainty, others are not as pessimistic. Robert Wetzler, a director in Fitch Inc.'s health care group, knows that non-profit hospitals have been under stress. For the year ended Sept. 30, Fitch downgraded the long-term ratings on 14 hospitals and upgraded none. But Wetzler sees a light at the end of the tunnel. "Hospitals that had the weakest credit and were the most poorly operated have already failed," he said. "I think most hospitals have learned to live under the BBA and they've adjusted." For analyst Weaver, who has a buy recommendation on almost all publicly traded hospital stocks, the outlook is clearer than it ever has been. "If government reimbursements just stay stable for the next couple years while volume goes up, hospitals should be able to see margin expansion," she said. "But hospitals are always a two-decision stock. You don't buy and hold them forever. You've always got to look for an exit." - Kris Hundley can be reached at hundley@sptimes.com or (727) 892-2996. Vital statisticsBoth for-profit and non-profit hospitals are seeing improved financial results: Tenet Healthcare Corp.: Earnings were up 30 percent (quarter ended Feb. 28). Health Management Associates Inc.: Net income was up 17 percent (quarter ended Dec. 31). HCA-The Healthcare Co.: Earnings per share excluding special charges up 24 percent in 2000. Bayfront Medical Center, St. Petersburg: The hospital had a $4.9-million profit in 2000, compared with a surplus of $600,000 for 1999. Tampa General Hospital, Tampa: The hospital had a $4.19-million profit in quarter ended Dec. 31, compared with a loss of $9.31-million for the same period a year earlier.
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