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Hospitals deliver black ink

Rochester Business Journal
July 12, 2013

The University of Rochester Medical Center's Highland and Strong Memorial hospitals finished 2012 in the black.
The teaching hospital's 2012 revenues were $1.17 billion, up 7 percent from $1.09 billion in 2011. Its operating income of $96.1 million was up 54 percent from $62.3 million a year earlier, and its net surplus of $52 million was up 91 percent from $27.1 million. Strong showed an 8.1 percent operating margin last year, compared with 5.7 percent in 2011.
The roughly 350-bed Highland, a community hospital boosted by programs shared with Strong and UR's medical school, finished 2012 with revenues of $294.5 million, operating income of $14.1 million and a $4.7 million net surplus, yielding a 4.8 percent margin.
Revenues were up 3 percent from $285.3 million in 2011; operating income dropped 25 percent from $18.8 million. Highland posted an operating margin of 6.6 percent in 2011. Highland booked red ink of $7.3 million in 2011.
Highland's bottom line includes adjustments to account for liabilities associated with the hospital's discontinued defined benefit pension plan. In 2011, the adjustment, which reflects a discount rate applied to the pension plan assets, was unusually high at $26.7 million. Last year, thanks to a lower rate and offset by a 12 percent increase in the plan's asset value, the adjustment shaved $10.1 million off Highland's bottom line.
The defined benefit plan was a legacy URMC inherited when it took over the formerly independent Highland some 12 years ago. It discontinued the plan two years ago and has since offered new hires a defined contribution option.
The adjustments to the hospital's bottom line, which now are only on paper, are an attempt to account for actual costs the medical center will incur to pay post-employment stipends to Highland retirees over the next few decades, said Leonard Shute, the hospitals' chief financial officer.  
While the hospitals remain financially strong, Shute says tougher times could be ahead. Results last year were boosted by a higher than usual onetime gain tracing to third-party payer adjustments, he said. In addition, challenges in the shifting U.S. health care landscape await both facilities.  
Ambulatory procedures, such as same-day surgeries at URMC's Sawgrass Drive and Clinton Crossings facilities in Brighton, a growing revenue source, accounted for much of Strong's revenue increase last year, Shute said.
Outpatient services accounted for 44 percent of Strong's revenues last year, up from 37 percent in 2005. That trend reflects a general movement in health care: Non-invasive procedures-from knee operations to tonsillectomies to gall bladder removals and cataract operations-that used to keep patients in the hospital for days are now routinely performed as same-day surgeries.

Occupancy rates
Still, both URMC hospitals' average occupancy rates-93 percent for Strong and 73.2 percent for Highland-remain high, and patients admitted for hospital stays are often sicker, Shute said. 
High patient volumes are a blessing and a curse. Full floors make for efficient use of facilities and generate revenues sufficient to stay ahead of overhead costs. But a plethora of patients can mean bed shortages, making it hard to place patients who need to be admitted from emergency departments.
Because new state rules call for higher numbers of patients to be classified as under observation, Strong's and Highland's official occupancy numbers do not tell the whole story, Shute said.
Strong's observation cases last year showed an 8.7 percent increase from 2011 and were up 20.8 percent from 2009. Highland's observation cases were up 9.2 percent over 2011 and showed a 73 percent jump from 2009.
In terms of the number of patients housed versus the number of beds it has, Strong's actual occupancy rate often tops 100 percent, Shute said. Repeating a complaint other area hospital officials have voiced, he added that reimbursements for patients under observation are lower than reimbursements for admitted patients. 
While he expects the URMC hospitals to again finish 2013 in the black, Shute predicted future results will not be quite as good as 2012. 

Changes coming
Shute's caution is based in part on uncertainties as Patient Protection and Affordable Care Act reforms kick in. Under federal reform, Medicare rates will be flat. And under the state's Medicaid reform initiative, Medicaid rates will fall, Shute said. Continuation of the federal sequestration would mean another 2 percent shaved off reimbursements.
Meanwhile future collections of the third-party payer adjustments are virtually certain not to come close the $26.2 million URMC collected in 2012, a banner year for settlements in the medical center's favor that gave a significant boost to its hospital finances.
Private and government insurers settle accounts with hospitals annually, belatedly paying for wrongly denied claims. Last year happened to be a year in which URMC came in with unusually large payouts from Medicare and Medicaid on top of some $4 million collected from its main private third-party payers, Excellus BlueCross BlueShield and MVP Health Care.
Government and private third-party payers are shifting reimbursements away from the current fee-for-service model, which pays doctors and hospitals a set fee for each procedure, office visit or hospital stay. In new and evolving payment models, providers will increasingly share risk or be offered an opportunity to share savings with insurers.
While many providers see opportunities to focus more on patients and foster greater continuity of care in new arrangements such as patient-centered medical homes, "there is great uncertainty in future impacts," Shute said.
Like many area providers, Shute fears the 2014 rollout of the state's insurance exchange could cut hospital revenues.
While projections assume greater numbers of insured patients will mean that hospitals will dispense less uncompensated care, enrollees in lower premium insurance exchange plans will have high out-of-pocket expenses that many low-income patients may not be able to pay.
An informational bulletin issued recently by the New York Health Plan Association, an Albany-based trade group for many of the state's private health care carriers, puts maximum annual out-of-pocket costs for bronze-level plans, the lowest premium products in New York's exchange, at $6,350. The next lowest level plans, silver, would have maximum out-of-pocket expenses of $5,000.
Unity Health System CEO Warren Hern told the Rochester Business Journal last year that similar out-of-pocket costs-demanded of enrollees in the private high-deductible health plans local employers are increasingly offering-had led to a slowdown in payments and an uptick of charity care for Unity Hospital.
Strong's uncompensated care expenses in 2012 stood at some $49 million, up from roughly $32 million in 2008.
When the New York insurance exchange kicks off, Shute expects the state to cut or reduce sponsorship of some of the low-premium plans with less cost sharing than exchange products that it now offers and instead send low-income individuals to the exchange.

7/12/13 (c) 2013 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email

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