Toldeo Health Insurance

St. Luke's considers merger as losses rise

St. Luke's Hospital is considering merging with another local hospital group - most notably Mercy or ProMedica Health System - as it continues to be shut out of lucrative insurance contracts, its chief executive says.

The independent nonprofit Maumee hospital had an operating loss last year of $8.8 million, an amount based on the business of caring for patients that is expected to be even higher this year.

Although it has upward of $70 million in reserves to keep it going, a merger or other arrangement may be necessary unless St. Luke's can negotiate better health insurance contracts with existing or additional insurance providers, said Dan Wakeman, St. Luke's president and chief executive officer.

Ongoing losses from operations at St. Luke's have nothing to do with cost and quality, both of which are favorable, Mr. Wake-man said.

He said St. Luke's was removed from ProMedica's Paramount Health Care network eight years ago, and so far, negotiations with other insurance companies have yielded only low-paying reimbursement contracts that are not enough to cover its costs, which he characterized as low.

"It has to do with how much leverage you have on the market," Mr. Wakeman said. "We happen to be a casualty of the marketplace."St. Luke's last year was the only Toledo-area hospital with an operating loss.

However, the University of Toledo Medical Center, the former Medical College of Ohio, with which St. Luke's also has had affiliation discussions, did not do as well as expected in its most recent fiscal year.

How others fared
In the fiscal year through June 30, UTMC had an operating profit of $2.9 million, nearly $11 million less than expected.

Operating profits or losses are based on revenues received from the business of caring for patients.

The Blade annually examines how hospitals are doing financially by obtaining the most recent Internal Revenue Service forms filed by the three nonprofit entities, St. Luke's, Mercy, and ProMedica, as well as other statistics from the three and UTMC.

As a public institution, UTMC doesn't file the same annual IRS forms, which are called 990s, as the other hospitals, but it keeps public financial records.

Though none of the Toledo-area hospitals is a for-profit entity, each needs to generate enough revenue so it has money to reinvest in facilities and equipment.

With an operating profit of $19.7 million and corresponding operating margin of 11.35 percent, Flower Hospital in Sylvania again had the single best financial result among all Toledo-area hospitals for last year.

Its parent company, ProMedica, again fared best among hospital groups with an operating profit of $52.1 million and operating margin of 3.42 percent.

Flower had growth in outpatient services, including oncology and surgery, which helped boost its revenues, said Kathleen Hanley, ProMedica's chief financial officer.

"We held our own," she said of ProMedica overall. "It was a challenging year."

Executive pay
Mercy's president and chief executive, Steve Mickus, last year bypassed ProMedica's Alan Brass as the highest-paid local hospital executive, with a compensation package totaling $1.95 million, a 38.3 percent increase from 2007.

Mr. Brass retired this year as ProMedica chief executive, a job for which he received $1.94 million in total compensation last year; his final pay will not be available until next year.

Mr. Mickus last year received a one-time payout as part of a five-year retention bonus from Mercy parent Catholic Healthcare Partners in Cincinnati, for which he was named chief operating officer in December, 2008.

He will fully assume that role next year. Mr. Mickus also is head of Catholic Healthcare facilities in Lima, Ohio, and Lorain.

At St. Luke's, meanwhile, Mr. Wakeman received $288,671 in total compensation last year after assuming the CEO role in mid-February. He was the Toledo area's lowest-paid top hospital executive.

St. Luke's is the only local hospital that has not had layoffs last year or this year. Employees did start taking some time off without pay in 2008, but business increased this year after Anthem Blue Cross and Blue Shield included the hospital in its network starting in July.

The Maumee operation is the last independent hospital left in the Toledo area after consolidations in the 1990s that formed ProMedica and Mercy.

Economic realities
Impending health-care reform and limited funds to buy equipment and expand programs have made hospitals nationwide consider relationships with erstwhile competitors, said Anne McCune, who works with hospitals and their executives as senior vice president of strategy and governance for Ingenix Consulting.

Some hospitals are merging either because they need a larger player to help lower costs and share services or they need added power to negotiate contracts, Ms. McCune said.

They also may have aging buildings, trouble recruiting doctors, or other issues that put them at a disadvantage in a market, she said.

ProMedica said it is exploring a variety of collaborative opportunities with other health-care providers in the region, including St. Luke's.

Mercy also said it is routinely in conversations with St. Luke's and others to look at ways to enhance health-care services in northwest Ohio and southeast Michigan.

And both hospital groups have considered moving more into the growing Maumee-area market, St. Luke's backyard.

Meanwhile, both ProMedica and Mercy, the latter of which had a $24.8 million operating profit and 2.9 percent operating margin last year, expect to have similar operating margins this year despite providing more free care.

UTMC, which also is providing more charity care and recently laid off or reduced hours for about 75 employees, is shooting for a 3 percent operating margin for the fiscal year ending June 30.

None, however, expects more layoffs next year, officials said.

Mercy, which has a high percentage of self-pay as well as Medicaid patients, anticipates its free care will double from last year to $31 million because of the numbers of people who have lost jobs and health-care coverage.

The amount of charity care at Mercy hit its peak in May and has been level since, said Samantha Platzke, Mercy's chief financial officer.

"I'm hoping that we don't continue to increase, but we're very very closely connected with what the unemployment rate does in our area," she said.

St. Luke's woes
This year, as operational losses continued at St. Luke's, Mr. Wakeman and other St. Luke's executives took pay cuts, and wages for all other employees were frozen. All employees gave up vacation time, and for the first time, they are contributing to their health-care coverage.

Another hit for St. Luke's last year came from struggling financial markets, causing an $85 million drop in net assets.

The hospital's defined-benefit pension fund, which will be frozen at the end of this year, was underfunded by $50.5 million last year, and the value of St. Luke's reserves also declined because of market drops, Mr. Wakeman said.

Plus, a new state tax on hospitals will cost St. Luke's $2 million annually, hospital officials said.

David Oppenlander, the hospital's vice president and treasurer, said losses will continue to plague St. Luke's operating performance, which is expected to diminish in 2010 to a loss of $4 million from an estimated $8.8 million-plus this year.

The Maumee hospital is negotiating with one large, unidentified insurance company to establish what probably would be Ohio's first value-based hospital contract.

St. Luke's would receive payments to partially cover costs - an incentive to keep costs low - and then would get bonuses for meeting established quality targets, Mr. Wakeman said.

Hospital officials hope that contract will be settled and help strengthen St. Luke's balance sheet, and other insurers will follow the lead, Mr. Wakeman said.

Otherwise, the issue may come down to merging with another hospital group, Mr. Wakeman said.

"That's not our first option, but certainly it is an option," he said. "We're certainly open to the discussions."

Looking ahead
Ms. McCune, the Ingenix senior vice president, said St. Luke's strategy is valid but ambitious, especially because it will need to ensure that it has accurate quality data.

She said the health-care industry is heading toward payment contracts based on quality and costs.

UTMC, which also struggled in its last fiscal year, is working to improve profitability by renegotiating contracts with companies that supply medical devices, better controlling pharmaceutical costs, and trying to secure improved payments from insurers.

Another strategy is to improve assessment of patients waiting for care in the emergency room by adding nurse practitioners and physician assistants to address minor ailments, said Scott Scarborough, UT's senior vice president for finance and administration.

Mercy is continuing to work on efficiency, such as improving the patient flow at Mercy St. Vincent Medical Center.

The key is organizing care for roughly 350 patients so they all get tests and services they need without long waits and other problems, officials said.

St. Charles Mercy Hospital in Oregon bounced back last year from an operating loss in 2007.

Regaining a contract with Anthem Blue Cross and Blue Shield helped the hospital's volume increase, said Ms. Platzke, the chief financial officer.

"That's where we've seen the best improvement," she said.