by James A. Bacon
The debate over hospital industry profitability, and the implications of that profitability for public policy issues such as Medicaid expansion and the dismantling of Certificate of Public Need regulations, has flared up again with the publication two weeks ago of 2014 profit-and-revenue numbers for Virginia’s hospitals.
The newest numbers from Virginia Health Information show that the combined yearly profit for reporting Virginia hospitals was $1.9 billion, as of November 2015, up $150 million from the previous year and an increase of 8.6%, states the Thomas Jefferson Institute for Public Policy (TJI) in “How Are Virginia’s Hospitals Doing Today — with Just Released, Updated Numbers.”
When viewed on a regional basis, the industry was solidly profitable in all five regions of the state, said the TJI report. While it’s true that 34 individual hospitals are in the red, the number of hospitals operating with deficits decreased by seven last year.
The profitability numbers are a start contrast with the rhetoric emanating from the Virginia Hospital and Health Care Association (VHHA), wrote author Michael Thompson. In a December 1 letter to Governor Terry McAuliffe, the VHHA contended that hospitals were threatened by declining reimbursements, more than $600 million in discounted services to the poor, $400 million in Medicaid underpayments and reductions in Medicare reimbursement rates.
“It is hard to comprehend what the VHHA is talking about,” wrote Thompson. “The numbers that are reported by these hospitals and health care facilities simply show a different story. …
“For the hospitals to cry wolf and urge a substantial increase in government assistance simply is not credible. The hospitals overall do not need an expansion of Medicaid and they do not require the continuation of the anti-competitive Certificate of Public Need laws.”
In its own look at the numbers, the VHHA argued that overall profitability numbers obscure what is happening on a case-by-case basis: 25% of all acute care hospitals and 40% of rural hospitals lost money in 2014. VHHA also contends that the industry remains under heavy stress as additional cost cuts from the Affordable Care Act are implemented. Wrote the VHHA:
It is commonly accepted in the industry that achieving a 4 percent operating margin is the minimum threshold necessary for hospitals to maintain fiscal stability and provide for capital expenditures. … Financial pressure … can impede a hospital’s ability to make facility and equipment upgrades so patients have access to state-of-the-art treatment. Based on VHI’s 2014 data, 18 of 31 rural hospitals fell below that mark. Statewide, 40 of 89 hospitals were in that category, which includes some with negative margins and others with modestly positive margins.
The chart above shows how the cuts mandated by the Affordable Care Act, other congressional legislation, and Centers for Medicare and Medicaid Services regulations play out between 2011 and 2021. Virginia’s hospital industry absorbed $400 million yearly in cuts by 2014 and expects to get clobbered by roughly $550 million more by 2021.
Bacon’s bottom line: We need to do some deeper analysis.
The industry shrugged off $400 million in added costs between 2010 and 2014, and managed to maintain a high level of profitability. How did that happen, and can it happen again? Did the industry benefit from new sources of revenue and over those four years, such as the enrollment of 87,000 Virginians in the federally insured Obamacare marketplace? Will countervailing factors continue to offset higher mandated costs over the next six years?
Who are those unprofitable hospitals? How many are independent, and how many belong to profitable health care systems? (Roanoke-based Carilion Health System, for example, encompasses numerous rural hospitals yet remains profitable system-wide.) And how many are start-up facilities, which typically take several years to move from red to black?
Digging even deeper, what are the economics of health care systems? Even if rural hospitals operate in the red, do they contribute to system-wide profitability by funneling patients to the system’s tertiary care hospital (Roanoke Memorial Hospital in the case of Carilion)? Just because health-system accounting shows a hospital to be losing money doesn’t mean that it’s in danger of closing.
How much profit is it reasonable for hospitals to make? In a free market, that’s not a relevant question for government policy makers to ask. But when hospitals function as quasi-utilities, and when more than half the hospitals in the state are not-for-profit, it is a fair question. The $550 million in anticipated added costs translates into less than 30% of Virginia hospital profits. A loss of that magnitude would hardly cripple Northern Virginia’s 10 hospitals, which collectively reported an operating margin of 8.2%, or Central Virginia’s 14 hospitals, which reported a collective margin of 8.1%, although added costs could prove detrimental to the 16 hospitals in Virginia’s northwest region, which enjoyed a collective margin of only 2.1%.
We can’t begin to have an intelligent debate over Medicaid expansion or Certificate of Public Need without getting answers to these and many other questions.
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