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High level of profit by area hospitals defended by health care providers, questioned by critics as excessive, economically harmful

posted June 7, 2015 12:03 a.m. | updated June 7, 2015 1:00 a.m. (CDT)
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by / Andrew Dowd. bio | email

  • Hospital_2_060715.jpg
  • Linton_Randall_121814.jpg
    Randall Linton, CEO of Mayo Clinic Health System in Eau Claire
  • Nelson_Dave_060515-38
    Dave Nelson, chief financial officer for HSHS Western Wisconsin Division
  • Farrow_Peter_090113-48
    Peter Farrow, CEO of Eau Claire insurance provider Group Health Cooperative

All three hospitals in the immediate Eau Claire area were in the top dozen of Wisconsin’s 129 general medical-surgical hospitals when it came to money left over after paying all their bills, according to the latest available state statistics.

Reports from the Wisconsin Hospital Association Information Center showed that OakLeaf Surgical Hospital was No. 4 in profit margin in fiscal year 2013. Eau Claire’s not-for-profit hospitals affiliated with Mayo Clinic Health System and Hospital Sisters Health System ranked 10th and 12th in the state, respectively, for their net income margins.

And even with a patient population that relies more on Medicaid than most Wisconsin hospitals, HSHS St. Joseph’s Hospital in Chippewa Falls had an income margin 4 percent above the state average — landing it in 23rd place.

Robert Kraig, executive director of advocacy group Citizen Action of Wisconsin, said the Chippewa Valley health care market is both high-quality and high-cost, which turns into the area’s notably high price of insurance. He believes that’s due to a couple of major companies dominating the market but not competing when it comes to prices.

“I don’t think the marketplace generates that kind of pressure,” he said.

Had the four hospitals in Eau Claire and Chippewa Falls finished at the state average of almost 11 percent income margin at the end of their 2013 fiscal year, they would have put $72.4 million in their coffers.

Instead, they generated a combined $140.8 million in black ink when closing their ledgers for their 2013 fiscal year — $68.4 million more than the Wisconsin average. Mayo had a net income of $66.6 million, Sacred Heart $49.1 million, OakLeaf $13.9 million and St. Joseph’s $11.2 million.

Even so, HSHS and Mayo Clinic raised prices at their local hospitals by 3.9 percent for all or part of 2014, according to public notices.

While not disputing that 2013 was a good year for Eau Claire area hospitals’ bottom lines, health system leaders in the Chippewa Valley said the higher revenues go back into their buildings and supplement other facilities with tight budgets or even losses.

“For Mayo Clinic Health System, to separate financially one hospital from the system does not give an accurate picture,” said Randall Linton, CEO of Mayo Clinic Health System in Eau Claire.

Although Mayo’s Eau Claire hospital posted a 21.6 percent net income in 2013, Linton noted that helped offset other facilities, such as the system’s Oakridge hospital in Osseo, which ran at a 1.3 percent loss that year.

But advocates and insurers familiar with Wisconsin’s health care markets see the rising income margins as another symptom of historically high costs borne by Eau Claire area employers and consumers.

Peter Farrow, CEO of Eau Claire insurance provider Group Health Cooperative, views the higher health care prices — in particular the large income margins made by area hospitals — as a potential deterrent to companies considering a move to the Chippewa Valley.

“Health care costs are a growing economic threat to the growth of employment in the Chippewa Valley,” he said.

System supplements

Executives at Eau Claire’s major hospitals attribute higher prices and an above-average income margin to complex procedures that other medical centers don’t do.

“It offers specialized care not available at many other hospitals,” Linton said of Mayo’s Eau Claire hospital, which serves as a referral hub for Mayo’s regional network, pulling in patients from a 100-mile radius.

He used the example of a patient who lives in Mondovi and would see her primary doctor there at a clinic. But a complex surgery would require a trip to Mayo Clinic’s Eau Claire hospital, which could be followed up with therapy at Mayo’s Oakridge center in Osseo, which would be closer to her home.

Mayo Clinic’s network in northwestern Wisconsin includes 14 clinics and five hospitals in a six-county territory. Although the Eau Claire hospital had a 21.6 percent income margin, the whole regional network ended 2013 with a 6.3 percent net income, Linton said.

The Wisconsin Hospital Association report noted that looking at hospital income alone doesn’t paint a complete picture of how modern health systems operate.

“Hospitals frequently provide the operating margin to allow health systems to support unprofitable but necessary integrated services,” the WHA report stated.

Services that would struggle on their own include hospice centers, nursing homes, behavior health, dialysis, physician clinics and home health, the report stated.

WHA surveyed 19 health systems — representing 88 Wisconsin hospitals — finding that though the hospitals had an average operating margin of 10.1 percent, that shrunk to 3.8 percent when nonhospital services were included. The WHA is lobbying for changes in state-mandated hospital data reporting to better reflect modern health care delivery systems.

As with Mayo’s Eau Claire hospital, HSHS Sacred Heart Hospital also has complex services including neurosurgery, oncology and cardiovascular surgery. Dave Nelson, chief financial officer for HSHS Western Wisconsin Division, said that contributes to the higher average patient costs shown in WHA reports.

“Each hospital in Wisconsin provides a varying array of services, and not all hospitals provide high-cost tertiary care,” Nelson said.

The above-average margins at HSHS hospitals in Eau Claire and Chippewa Falls also goes toward programs that struggle on their own.

St. Joseph’s has the largest alcohol and drug addiction rehabilitation program in northern Wisconsin, Nelson noted, which doesn’t pay well when compared with other services.

“This program requires many different resources to operate, yet has very little reimbursement because the majority of the patients we serve are from uninsured and Medicaid populations within northern Wisconsin,” Nelson stated.

Both of the HSHS hospitals in the area contribute toward primary care clinics to serve rural populations. Sacred Heart has invested in clinics for underserved areas, namely Arcadia and Osseo, Nelson said, and St. Joseph’s provides $1.5 million annually to Health Associates Primary Care Clinic in Chippewa Falls.

Farrow doubts that Eau Claire employers get much solace from the explanation that higher prices they pay for health care are used to subsidize facilities in other communities. He also notes other health systems operating throughout Wisconsin deal with the same pressures, but the income margins of both of Eau Claire’s not-for-profit hospitals still run near the top statewide.

Recession impact

Not all hospital incomes are directly tied to patient bills, and they fluctuate due to other factors.

Sacred Heart’s and St. Joseph’s rising margins in 2013 were due largely to an extremely strong return on investments, accounting for more than half its earnings, Nelson said. The hospital’s income from its investments had the opposite effect when the economy struggled in 2008 and 2009.

“This recession hit us hard, as our return on investments were all lower, resulting in a lower margin,” he said.

The statewide average for the 2008 fiscal year bears this out, as both local HSHS hospitals struggled to break even during that period — resulting in their tightest cash flow of the past decade.

Another boost to Sacred Heart’s margin in 2013 was an incentive from the federal Center for Medicare & Medicaid Services that awarded hospitals a better reimbursement as they expanded their use of electronic health records.

Profit leader

OakLeaf Surgical Hospital, which moved from Eau Claire to a new building in Altoona last fall, is indicative of small, specialty hospitals in Wisconsin that are among the most profitable.

The private hospital owned by physicians still reins as the highest-profit hospital in the region and No. 4 in the state, although that margin in the past decade has been on a slight downward trend.

“OakLeaf is a physician-owned for-profit hospital, however that does not mean we are the most expensive,” CEO Anne Hargrave-Thomas said in a statement. “Our positive operating margin is a function of efficiency, monitoring expenses and developing flexible staffing models.”

The small hospital does have the area’s lowest patient volume, equivalent of 6 percent of Mayo’s 2013 Eau Claire hospital admissions and 9 percent of Sacred Heart’s.

OakLeaf does not have an emergency department, delivery room, behavioral health unit or other departments that result in high expenses for hospitals.

Focusing on surgeries led to OakLeaf having the fourth-highest average outpatient bill in Wisconsin and ninth-highest average inpatient costs in the state, based on WHA reports from 2013.

But for procedures they do perform, Hargrave-Thomas referenced the hospital price comparison website WiPricePoint.org, which showed the Altoona center was the least expensive in the area when it came to common surgeries such as knee and hip replacements.

The concern with for-profit hospitals is that they gobble up the most lucrative procedures in an area, said Citizen Action of Wisconsin’s Kraig, which can raise the cost of care in an area for nonprofit hospitals.

Assets grow

Hospitals in the Eau Claire and Chippewa Falls area also more than doubled in value in recent years, due in large part to additions and remodeling projects.

Mayo Clinic Health System has put more than $200 million into the former Luther Hospital campus in the past decade, Linton said. Since 2006, a new energy plant, a parking ramp, a critical care unit, an emergency department, new inpatient units, a cancer center and a family birth center have been added.

A report of the Eau Claire hospital’s assets showed it went from $195 million in 2006 to $573 million in 2013.

Meanwhile, Sacred Heart also more than doubled its value in the same time frame — growing from $238 million to almost $486 million. As seen by the scaffolding that has marched along the facade of the hospital for about three years, an extensive window replacement and upgrades to the building’s energy efficiency will finish this summer.

Several patient care areas also have been remodeled, and Nelson said an emergency services department expansion will begin in fall, followed by remodeling in the women’s and infant center.

St. Joseph’s Hospital went from $54.5 million in assets in 2006 to $117.5 million in 2013. That growth includes remodeling patient care units, finishing renovations to the emergency room and women’s and infant care center, expanding wound care, and opening a new office building and outpatient rehabilitation center.

Sacred Heart also spends more than $10 million annually and St. Joseph’s puts $4 million each year into replacing patient care equipment and upgrading technology, Nelson noted.

OakLeaf Surgical Hospital’s value growth was much more sudden as it moved from Eau Claire to Altoona. The small specialty hospital’s $16.9 million in assets reported in 2012 had doubled to $33.9 million a year later.

Costs to consumers

Comparing 2015 premiums in average plans offered through health insurance exchanges showed Eau Claire was among the most expensive markets in Wisconsin, especially compared with elsewhere in Wisconsin and Minnesota.

“There’s definitely a disparity between Eau Claire and the Twin Cities,” said Kraig, leader of Citizen Action of Wisconsin, which advocates for consumers on health care, economic and democracy issues. “We found that Eau Claire is 63 percent more expensive than the (Twin) Cities.”

And Chippewa Valley residents pay $1,500 annually more in health insurance premiums than the Minnesota state average, he said.

The group’s 2015 report released in April contrasting the two states showed the Madison area was closest in price to Minnesota, while only Superior, La Crosse and Hudson were more expensive than Eau Claire. Kraig’s group is skeptical of insurance rate increases that seem to easily get rubber-stamped in Wisconsin while fought more by Minnesota politicians.

But whatever the cost to consumers, Affordable Care Acts requirements mandate insurers spend at least 80 percent directly on medical care, Kraig said.

“No matter how you slice it, a bigger portion is hospitals and doctors,” he said. “High premiums and high out-of-pocket costs just reflect the underlying high cost of health care there.”

And hospital costs hold the most influence over health insurance costs, said Marty Anderson, director of consumer marketing for Security Health Plan of Wisconsin, which provides insurance in the Chippewa Valley through the federal marketplace at HealthCare.gov.

Regional nonprofit insurers including Security Health Plan keep about 10 percent of insurance payments as their overhead, he said, leaving the remaining 90 percent for payments to health care.

For every dollar insurers spend on health care, 50 cents is for hospital care; 33 cents goes to professionals, including doctors, nurse practitioners and chiropractors; 15 cents covers prescription drugs; and two cents is used for other expenses, Anderson said.

Bargaining power

Farrow, of Eau Claire’s Group Health Cooperative, attributes the area’s higher costs and hospital income to a local economy in which consumers and insurers lack the leverage to bargain lower rates from large health care providers.

“There really is no sense of price pressure for providers in the Chippewa Valley,” he said.

Both Farrow and Kraig note that the Chippewa Valley insurance market is in stark contrast to Dane County, which has some of the lowest health care costs in the state.

Whereas the Madison area has insurers covering many large companies that combine to form pools of employees with power and leverage to negotiate prices with health care providers, Farrow said, the Chippewa Valley market has smaller insurance companies competing for smaller groups.

“We don’t have any significant large employers that will band together,” he said. Many of the Eau Claire area’s top employers are health care or public education, he noted.

For the Chippewa Valley to compete better for prices, Farrow said, it starts with consumers and employers recognizing the actual costs of health care, beyond what they pay in insurance premiums, deductibles and co-payments.

“People don’t pay the full cost of their health care costs, so they don’t feel that pressure,” Farrow said.

Beyond that, he recommends employers band together to form larger insurance buying pools that have better leverage to bargain with health care providers. And he also said area health care systems “need to take that nonprofit charter seriously” and consider how their above-average income margins impact the community.

If the four area hospitals had made the 2013 state average for income margins, Farrow said, that would have made $68 million available for use elsewhere in the local economy.

“If we saved just that difference in health insurance costs, I figured it would lower employer premiums by 5 percent,” he said.

Cost shifting argument

Within public notices of annual price increases, area hospitals typically note that government reimbursements from Medicare and Medicaid fall short of the actual cost of health care.

At both Mayo and HSHS hospitals in Eau Claire, about 65 percent of their bills go to these programs for low income and retired people.

“Thus, for more than half of our patients, we are paid less than our costs,” Linton wrote. “Those costs are shifted to people who carry private pay insurance.”

For instance, when Mayo Clinic raised prices by 4.9 percent at the start of 2013, Medicaid reimbursements stayed flat while Medicare went up 1 percent.

A study of Wisconsin hospital data by trade publication HCTrends found that while commercial insurance pays an average of 63 percent of the amount that hospitals bill them, Medicare pays 33 percent. When it comes to Medicaid reimbursements, Wisconsin fared poorly, as hospitals got 65 percent of their actual costs for care, according to a Wisconsin Hospital Association news release.

“If any business, including hospitals, did not shift these uncovered costs, the business would go broke,” Linton said.

He and other hospital administrators visited the Leader-Telegram in April with a Wisconsin Hospital Association representative, promoting a few state budget items for the health care system — chief among them was better Medicaid reimbursement.

But given that both major Eau Claire hospitals came out of 2013 in great financial shape, Farrow questioned why they need more from taxpayers.

“If they’re already making a 20 percent profit on the hospital side, why do they need more money?” he said.

And while Kraig said he’s not necessarily against a better Medicaid reimbursement, he said it would not lower costs of people who have commercial health insurance.

“Raising the (government) rates does not bring private rates down,” he said. “Hospitals are charging what they can charge already.”

Both Kraig and Farrow agreed that giving hospitals more Medicare and Medicaid money would not improve commercial health insurance prices.

The state government spent its budget increase two years ago on raising medical assistance payments that health care providers had consistently asked for, but Farrow said that just added to hospital profits.

“It just literally went to the bottom line of every hospital,” he said.

ACA impact

Hospital leaders say that the commercial health care exchanges that began providing coverage last year under the Affordable Care Act did not pull as many people off Medicaid as originally thought.

The WHA noted that the state projected 93 percent of those who lost Medicaid eligibility in recent years in Wisconsin were expected to enroll in commercial health insurance, but only 54 percent have. And Linton expects the long-term trend will be more people getting health care costs paid through the government.

“The ability to cost-shift is going to decrease” Linton said, as the amount of people on private insurance shrinks.

But the hospitals’ contentions about low government Medicare and Medicaid reimbursements and health care systems supplementing other programs doesn’t satisfy Farrow’s concerns with high local health care costs.

“It’s all a distraction,” he said.

If last year’s inaugural year of commercial insurance offered through exchanges created under the Affordable Care Act is any indication, another local insurer says hospitals financial situations are improving.

“Hospitals have been doing very well under the Affordable Care Act,” said Anderson of Security Health Plan.

The shift of some former Medicaid recipients to commercial plans that reimburse hospitals better leads him to expect significantly larger income margins when the WHA releases its 2014 figures in late summer.

While politicians have been debating the Affordable Care Act’s requirement that U.S. residents have health insurance, Kraig said that has prevented moving along to actually addressing affordability.

“In many ways the country’s been distracted over the endless debate on whether we should have health care reform,” he said. “You’re not getting to the next issue, which is cost.”

On Tuesday, Kraig’s Citizen Action of Wisconsin group sent out a news release warning consumers they should expect to pay more next year. Seven major Wisconsin health insurance companies filed preliminary premium proposals calling for 10 to 32 percent price hikes in 2016, according to the release.

New hospital

In April, Marshfield Clinic Health System and the Wausau-based Aspirus Network announced plans to create a new hospital in Eau Claire in the next two to three years

Few details have been announced, but leaders of the partnership between two well-known Wisconsin providers have said it will complement Marshfield Clinic’s existing Eau Claire facilities and compete with other hospitals.

“Having a hospital in our system allows us to better coordinate care and ultimately reduce health care costs,” Marshfield Clinic chief operating officer Dan Ramsey said in a statement to the Leader-Telegram. “Also, a new facility would operate more efficiently than older hospital facilities, again contributing to a targeted approach to reducing health care costs.”

But Farrow doubts another hospital is the cure to the area’s high prices.

“There’s very little data in the country to show that adding providers is going to make it more competitive,” he said. “It will probably lead to just more health care expenditures.”

Dowd can be reached at 715-833-9204, 800-236-7077 or andrew.dowd@ecpc.com.