The Impact of Physician-owned
Limited-service Hospitals on
Community Hospitals
Excerpts from Case Studies
Conducted by McManis
Consulting:
Wichita, KS
Lincoln, NE
Black Hills, SD
Oklahoma City, OK
Four case studies illustrate the impact of physicianowned limited service hospitals on community hospitals
and the patients they serve.
Lost patients and revenues lead to:
• A substantial decline in financial performance
• Actions to cut costs in other areas:
– Lay-off staff
– Cutback subsidized services
• Programs most at risk -- behavioral health, trauma, outpatient clinics, hospice,
home health, health education/wellness, outreach, community medical education
• Actions to protect/rebuild affected programs:
– Increase wages and bonuses to compete with limited-service
hospitals
– Note: Rebuilding programs is necessary since limited-service
hospitals do not serve all patients (e.g. no emergency access,
avoid low-income)
2
Full-service hospitals had to reallocate resources –
investing more to rebuild affected services, while
cutting back elsewhere.
Wesley Medical Center’s Actions Following the Opening of Galichia
Heart Hospital and the Kansas Spine Hospital
Competing with Limited-service
Hospitals to Maintain Critical
Programs
• Increased cath lab staff salaries an
average of $2 per hour (cost $2.5
million a year) and paid retention
bonuses of $7,500 each
Cutting Back on Other
Subisdized Services
• Laid off 120 full-time equivalent (FTE)
employees in 2001 and another 54 FTEs
in 2003
• Sold Occupational Medicine Clinic
• Closed Electron Microscopy Research
Center
• Closed pharmacy research program
Source: Wesley administration.
3
BryanLGH saw its bottom line decline by $10 million
per year, raising concerns about support for other
subsidized programs.
•
BryanLGH operates one of the few remaining mental health
inpatient programs (66 beds) at former Lincoln General site.
•
Mental health program requires a subsidy from other BryanLGH
service lines, especially cardiac services.
•
With fewer dollars available, BryanLGH’s ability to continue to
fund mental health at present service levels is questionable.
“The NHH doesn’t provide anything we don’t already have in the community …
fragmentation spreads out the business, erodes margins and puts quality at risk …”
Physicians practicing at BryanLGH
4
From 2000 to 2004, the surgical hospital’s net income
grew by $16 million…and the full-service hospital’s net
income fell by $17 million.
Net Income, Rapid City Regional Hospital
vs. Black Hills Surgery Center, 1998-2004
Net Income (millions)
30
Bond Rating
Downgraded
25
20
15
(Estimated)
10
5
0
-5
1998
1999
2000
2001
Rapid City Regional Hospital
*
2002*
2003
2004
Black Hills Surgery Center
Sources: IPO (2004) and RCRH (2004). RCRH had one time write-off of $6 million dollars in
2002. RCRH has a 7/1-6/30 fiscal year; BHSC uses a calendar fiscal year. BHSC’s 2004 net
income is an estimate based on data contained its investor owners’ 2nd quarter report.
5
In Spearfish, financial performance of the community
hospital also declined markedly.
Lookout Memorial Hospital Financial Margins
1997-2004
14%
9%
ASC purchased from founder and
converted to specialty hospital
Patient Service Margin
4%
Operating Margin
*
04
20
03
20
02
20
01
20
00
20
99
19
98
19
19
-6%
97
-1%
*A special provision of the Medicare Modernization Act of 2003 allowed LMH to reclassify for purposes of the wage
index significantly improving Medicare reimbursement
Source: Lookout Memorial Hospital
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The loss of revenue has left the full-service hospitals
with difficult choices.
•
Both full-service hospitals have begun to incur losses from patient
services and must rely on philanthropy and investment income to
cover costs.
– Lookout Memorial had to eliminate home health and hospice care for its
Wyoming residents
•
Although the effects have not fully played out, the choices open to
the full-service hospital system include:
– Reductions in subsidized and/or poorly reimbursed community services
(e.g., wellness)
– Reductions in services in outlying areas (e.g., support for critical access
hospitals, reduction in hospice and home health care)
– Staff lay-offs
– Reductions in non-paying or low-margin services
– Curtailments in plans for expanding services that would require subsidies
(e.g., endocrinology/diabetes)
– More dependence on philanthropy
– Price increases
7
Reductions in emergency call coverage by
physician-owners of limited-service hospitals
helped precipitate a statewide crisis in trauma
coverage.
•
•
Before the crisis, several Oklahoma City hospitals provided Level II
trauma coverage and OUMC provided the Level I trauma coverage for
the state.
When the neurosurgeons and other critical specialists opted out of
call coverage, the Level II trauma hospitals could no longer meet state
standards for specialty coverage. They began to downgrade to Level III
status.
•
•
This placed unsustainable burdens on OUMC, which threatened to
drop its Level I coverage unless others reinstated Level II coverage.
In the face of public pressure, the county medical society, the state
hospital association and others brokered a compromise …
– Neurosurgeons and other critical sub-specialists who had dropped off call
agreed to provide coverage for one Oklahoma City hospital each night to allow
for a rotating Level II trauma service.
– Meanwhile, OUMC and the university physicians would continue to provide
Level I coverage.
– Thus far, the voluntary compromise has held up. Most physicians in the critical
sub-specialties are participating.
8
Competition for staff increased labor costs – higher
salaries, bonuses and turnover costs.
Staff Turnover and Inducements to
Avoid Turnover at OU Medical Center
Lost
Staff
Registered Nurses
Respiratory Therapists
Other
Subtotal
40
3
13
56
Cost of
Turnover
$ 1,664,000
$
41,600
$ 459,680
$ 2,165,280
Bonuses to Prevent ICU Closure
$
466,000
Total
$ 2,631,280
Source: OU Medical Center administration.
9
Cost-cutting measures eliminated positions and some
programs in under-reimbursed services
St. Anthony’s Response to
Financial Losses Associated with
Limited-service Hospitals
•
Closed outpatient clinics around the city
•
Reduced the medical education program
•
Reduced the eye surgery program
•
Closed the child behavioral day treatment
program
Source: St. Anthony’s administration.
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Full text of the case studies can be found at:
http://www.hospitalconnect.com/aha/press_room-info/specialstudies.html
For further information, please contact
the study authors:
Keith Moore or Dean Coddington
McManis Consulting
6021 S. Syracuse Way, Suite 207
Greenwood Village, CO 80111
720.529.2110
kmoore@mcmanisconsulting.com
dcoddington@mcmanisconsulting.com
Or the sponsors:
American Hospital Association
Attn: Caroline Steinberg
Liberty Place, Suite 700
325 Seventh Street NW
Washington, DC 20004
202.626.2329
Colorado Health and Hospital
Association
Attn: Larry Wall
7335 E. Orchard, Suite 100
Greenwood Village, CO 80111
720.489.1630
csteinberg@aha.org
larry.wall@chha.org
Kansas Hospital Association
Attn: Tom Bell
215 S. 8th Avenue
PO Box 2308
Topeka, KS 66601
785.233.7436
Nebraska Hospital
Association
Attn: Laura Redoutey
1640 L Street, Suite D
Lincoln, NE 68508
402.458.4900
South Dakota Association
of Healthcare Organizations
Attn: Dave Hewett
3708 Brooks Place
Sioux Falls, SD 57106
605.361.2281
tbell@kha-net.org
lredoutey@nhanet.org
hewett@sdaho.org
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