Thursday, January 9, 2003

Alliance forecasts huge losses

Hospital group looks at major changes

By Tim Bonfield
The Cincinnati Enquirer

The Health Alliance of Greater Cincinnati, the Tristate's largest hospital system, expects to lose about $60 million a year by 2006, according to a recently completed internal financial forecast.

The projected operating losses reflect a combination of expected cuts in Medicare and Medicaid funding; sharp losses in investment income; rising numbers of uninsured and underinsured people; and soaring costs for wages, medical supplies, malpractice liability insurance and pension expenses.

Hospitals: University Hospital, Christ Hospital, Jewish Hospital, St. Luke Hospital East, St. Luke Hospital West, Fort Hamilton Hospital.
Admissions (excluding births): 90,421.
Births: 9,024.
Outpatient registrations: 810,887.
Outpatient surgeries: 39,749.
Emergency department visits: 275,288.
Operating beds: 1,511.
Physicians: Alliance Primary Care: 78 internal medicine, family practice and pediatricians in 19 locations.
Services: Alliance Laboratory Services
(Figures are for year ended June 30).
"Layoffs are not an immediate threat. This year will not be that bad. We'll start really feeling these cuts next year, and it will get worse in '05 and '06," said Ron Long, the Health Alliance's chief financial officer.

Instead of layoffs, the Health Alliance might have to delay introducing new medical technology, sell off portions of its system and contract out more services to cut costs. Meanwhile, it will try to increase revenue by adjusting services, lobbying legislators and continuing efforts to win higher payments from insurers.

The Health Alliance is a private, nonprofit organization that includes the Christ, University, Jewish, St. Luke and Fort Hamilton hospitals, and the Alliance Primary Care physician group. Overall, the Health Alliance employs more than 13,000 people, making it the third-largest employer in town.

In fiscal 2002, which ended June 30, the Health Alliance reported $6.4 million in operating income from $1.2 billion in total revenue. Revenue was split almost evenly between public and private sources.

Top executives completed a financial forecast late last year, but waited until Wednesday to make any details public. The forecast comes in sharp contrast to recent fiscal results.

In 1998, the Health Alliance had an operating loss of $52 million, which prompted a series of job cuts, management changes and other reforms. The Health Alliance has improved every year since, turning an operating loss into an operating profit in 2001 and 2002.

Unless key trends can be reversed, the system expects the losses to return, Mr. Long said. And while all Health Alliance hospitals are expected to suffer, University Hospital - the city's largest hospital and the region's top center for trauma care, organ transplants, medical education and care to the poor - will be hardest hit, Mr. Long said.

In many ways, the fiscal problems facing the Health Alliance face all Tristate hospitals, said Lynn Olman, president of the Greater Cincinnati Health Council.

"For the past couple of years, hospitals overall have been breaking even. But now, the economy has changed and a lot of hospitals are redoing their forecasts. The old assumptions aren't accurate anymore," Ms. Olman said.

In fiscal 2001 - the most recent complete data available - all three Tristate hospital groups - TriHealth, Mercy Health Partners and the Health Alliance - reported losing money, according to Allan Baumgarten, a Minnesota-based health analyst.

Of 18 individual hospitals studied, 10 had net incomes, eight reported losses. But the losses at the eight far outpaced the gains at the other 10, resulting in a marketwide loss of more than $100 million for Cincinnati hospitals.

Payments shrink

Among the income problems reported by the Health Alliance:

Medicare has reduced support for medical education, costing the Health Alliance about $4.5 million a year.

Medicare also has made it harder to collect extra payment for "outliers," or bills for complicated cases that exceeded standard payment rates for a particular conditions. The Health Alliance expects to lose about $3.6 million a year from this change.

Federal support for a statewide program that repays hospitals for "disproportionate shares" of care for the uninsured has dropped about 15 percent, which will cost the Health Alliance about $5.4 million a year.

A 2.9 percent increase in state Medicaid payments to hospitals that was supposed to take effect Jan. 1 has been delayed until June 1. Given Ohio's overall budget crunch, the Health Alliance assumes the increase will vanish completely, erasing $2.2 million a year in expected revenue.

Then there's investment income. In the booming 1990s, many hospitals counted on investment gains to offset losses in other funding sources. Not anymore.

The Health Alliance's investments lost $20 million in fiscal 2001 and another $13 million in fiscal 2002, which ended June 30, Mr. Long said. As a result, the system has quadrupled the amount of money drawn from day-to-day operations to underwrite its pension plan obligations.

Meanwhile, the financial forecast does not put a figure on another potential income problem: a legal fight started last month by TriHealth to share at least part of a Hamilton County tax levy for indigent care services.

University Hospital gets about $34 million a year from that levy. Any money that stops flowing to the hospital would just make the fiscal forecast worse, Mr. Long said.

Expenses soar

On the expense side, the fiscal concerns continue as expenses continue to outpace general inflation.

The Health Alliance projects that supply expenses will grow 8 percent a year, largely due to soaring costs of pharmaceuticals and exploding demand for medical devices such as drug-coated stents, pacemakers and defibrillators.

The Health Alliance projects salary and benefit costs will grow about 5 percent a year. The Health Alliance avoided a strike last year by University Hospital nurses by agreeing to a contract that will pay increases of 7 percent, 8 percent and 9 percent for the next three years. While nurses have been in high demand, hitting the 5 percent target likely means smaller raises for other employees, Mr. Long said.

Meanwhile, the Health Alliance was socked with a 40 percent increase in medical malpractice insurance rates for fiscal 2003; to $7 million from $5 million last year. It projects an 18 percent increase in 2004 and 10 percent annual increases after that.

To head off potential losses, the Health Alliance has taken some steps and plans more.

The system already has contracted out its purchasing department, much of its equipment maintenance services, and is considering outsourcing its cafeteria services. Late last year, it put its profitable 800-employee Alliance Laboratory Service up for sale, but has not yet announced a deal.

"The projected losses reflect what would happen if nothing changes. The idea is that we'll take action to reduce that figure," said Gail Myers, Health Alliance spokeswoman. "I can't speculate on what would happen if those actions don't work. We expect those actions to work."

Rebuilding suffers

A dimming fiscal outlook has one more long-term implication.

Years of low reimbursements and multimillion-dollar losses in the 1990s already have prevented Greater Cincinnati hospitals from spending as much on new buildings and equipment as hospitals in many other cities. A weak economic forecast only makes it harder to catch up.

Greater Cincinnati hospitals have gradually become older than national and state averages, despite recent expansions in growing suburbs, Ms. Olman said.

"This is a significant problem," Ms. Olman said. "If you have to make cuts every year just to break even, where is the capital going to come from to replace equipment?"

The Health Alliance hopes to spend $600 million on new construction, remodeling and updated equipment during the next five years. That's more than the cost of building the $404 million Paul Brown Stadium.

But as big as that number sounds, it still won't be enough to reverse the aging trend, Mr. Long said.

Right now, the average age of Health Alliance's six hospitals is 11.7 years, about 34 percent older than the national average of 8.7 years.

Five years from now, even after spending $600 million, the average age of Health Alliance facilities will be 12.9 years.

"We aren't keeping up with the rest of the country," Mr. Long said.


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