Follow the Ever-narrowing Trail of Money

by
  • Van-Putten, Clifton, MD
| Oct 28, 2013

Co-authored by Andre Motie, MD

Hospitals across the US, all over California, and certainly in the Central Valley, are bracing themselves for the effects of the Affordable Care Act (ACA) to kick in this year. There are more questions than answers at this point, particularly when it comes to understanding the financial side of these changes; administration is busy preparing, and implementation is certainly on the minds of all those who work in the health care industry.

The first significant change for many hospitals is the rollback of disproportionate share (DSH) payments to facilities that serve high percentages of MediCal and other government-payor-funded patients. Here’s how that works: On October 1, DSH hospitals saw CMS cut their customary payments to 25% of their most recent levels – to the so-called “empirically justified payment” written into the ACA. The remaining 75% that would have been paid out under the prior formula will be reduced by a further percentage and then distributed back to the hospitals using a complex methodology that takes into account the amounts of uncompensated care the facilities are continuing to provide in spite of expanded insurance availability under the ACA. It goes without saying that there will be some winners and losers in this new distribution scheme.

The following table illustrates where the hospitals are, financially speaking, in CSA District 5 (including Kern, Tulare, Kings, Fresno, Madera, Merced, Mariposa, Stanislaus and Tuolumne counties), and from it we might predict some of the effects of the looming payment changes.

Rank

Hospital

DSH?

Location

Ownership

Profit Margin %

1

Memorial

Yes

Los Banos

Sutter

4.3

2

Clovis Community

 

Clovis

Private/Non-profit

4

3

Tulare Regional

Yes

Tulare

District/County

3.8

4

Memorial

 

Modesto

Sutter

3.7

5

Children's

Yes

Madera

Private/Non-profit

3.2

5

Sierra View

Yes

Porterville

District/County

3.2

7

Delano Regional

Yes

Delano

Private/Non-profit

3

7

Mercy

 

Bakersfield

Dignity

3

9

Bakersfield Heart Hospital

 

Bakersfield

Private/For-profit

2.9

9

Fresno Heart & Surgical

 

Fresno

Private/Non-profit

2.9

9

Hanford Community

 

Hanford

Adventist

2.9

12

Fresno Surgical

 

Fresno

Private/For-profit

2

13

Sonora Regional

 

Sonora

Adventist

1.6

14

Saint Agnes

 

Fresno

Trinity

1.5

15

Memorial

 

Bakersfield

Dignity

1.4

16

Stanislaus Surgical Hospital

 

Modesto

Private/For-profit

1.2

17

Emanuel

 

Turlock

Tenet

1

18

Kaweah Delta

Yes

Visalia

District/County

0.6

18

Madera Community

Yes

Madera

Private/Non-profit

0.6

18

Oak Valley

Yes

Oakdale

District/County

0.6

21

Doctor’s

Yes

Modesto

Tenet

0.3

22

Kern Medical Center

Yes

Bakersfield

District/County

0.2

23

Community Regional

Yes

Fresno

Private/Non-profit

-0.8

23

Mercy

Yes

Merced

Dignity

-0.8

25

San Joaquin Community

Yes

Bakersfield

Adventist

-2.2

26

John C. Fremont

Yes

Mariposa

District/County

-3.6

Data from ahd.com

Take a moment to look at the profit margins of the most profitable hospitals. Then, recall that ten years ago the average profit margin of California hospitals was in the 5% range. Currently, even the most profitable hospitals in this area do not reach that level. This includes Clovis Community at 4%, as well as the specialty hospitals whose bottom lines benefit from low percentages of poor, sickly patients, coupled with high percentages of customers who hold commercial insurance as opposed to government-funded insurance. In addition, Clovis Community is currently benefitting from a market share “bounce” in Fresno County due to the buzz around the opening of its new all private room tower.

There are several area hospitals, (largely-government-payor-funded facilities), that recently displayed a relatively high level of profitability, along with the more affluent facilities. This might be an unexpected finding for some. However, upon closer examination this current profitability may have been achieved on the back of deferred maintenance and lower overhead. One CSA member said that at one of the “higher margin” hospitals in the Central Valley, “when it rains here, they put buckets around the lobby to catch the rain that leaks through the roof.” They need to renovate or replace that facility, something that will not be happening anytime soon. In addition, there are some looming bills coming due such as the payment arising from the EEOC national origin discrimination lawsuit against Delano Regional Medical Center. That lawsuit, brought by 70 Filipino nurses and other health professionals, against the medical center settled for $975,000. There is also the unfinished patient care tower at Tulare Regional. The project has remained stalled for months, and is running over budget. One wonders what the profitability of that hospital will be when funds are reallocated to finish the project.

At the bottom of the table are all the hospitals that are marginally profitable, running less than 1% margins, or even more disturbingly, running yearly deficits. These are all DSH recipient hospitals. This group includes the “safety net” teaching hospitals for Fresno and Kern counties. One might speculate that with further funding cuts to hospitals that are barely making it under the current regime, the results might well be catastrophic. We have already seen institutions adjusting in anticipation of reduced funding levels. Just this year, Community Regional cut 150 positions: Saint Agnes 75, Porterville 49, and Tulare 32. The retrenchment at these facilities is also in response to reduced surgical volumes in their operating rooms with the predictable decline in revenues.

So it will be interesting to see how these developments play out through the end of the year and into 2014. The challenge of guiding our practices and setting appropriate goals is akin to shooting an arrow at a moving target and trying to hit the bull’s-eye. Staying involved in hospital governance and their formation of new entities and payment methodologies is a given. In addition, one small piece of planning might well use the rubric suggested by the character “Deep Throat” in the 1976 film All the President’s Men: “Follow the money.”

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