How ‘profitable’ are Maine hospitals? Depends on whom you ask

Posted March 15, 2013, at 6:17 p.m.
Last modified March 17, 2013, at 5:53 a.m.

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Geoff Gratwick
Bridget Brown | BDN
Geoff Gratwick Buy Photo
Elizabeth Mitchell
Maine Health Management Coalition
Elizabeth Mitchell

The money that Maine owes to its hospitals under the MaineCare program has touched off fevered political debate in recent weeks, with the hospitals warning of “dire consequences” that could jeopardize access to health care.

Finding out how the debt has affected hospitals’ bottom lines is difficult as the state hospital association and a state agency disagree on a seemingly simple measure of their profitability.

Questions about the discrepancy between the hospitals’ lobbying group and the state health data organization over a widely publicized metric of hospital profitability highlight the complexity of assessing the financial health of Maine’s hospitals.

A Bangor legislator and physician, frustrated by a lack of clarity in hospital finances, has set his sights on better and more comprehensive reporting, calling the nonprofit hospitals’ tax documents a “sham.”

In urging lawmakers to repay the MaineCare debt, the Maine Hospital Association has pointed to narrow hospital operating margins as evidence of the burden. Now totaling $484 million in overdue bills dating to 2009, the debt continued to swell as hospitals served MaineCare patients without being fully reimbursed by the state, which splits the bill for the insurance program with the federal government.

MaineCare is the state’s version of the Medicaid program.

“When the state pays the outstanding hospital settlement debt, hospitals will then be able to stem the tide of job losses that have been occurring over the past several years,” Steven Michaud, president of the Maine Hospital Association, said in January during an event unveiling Gov. Paul LePage’s plan to replay the MaineCare debt. “It will also allow us to stop borrowing against lines of credit, which many of our hospitals have been doing just to meet payroll, and make vital investments into hospital facilities and, importantly, to pay local businesses for the services they provide to our members.”

Operating margin discrepancies

Statewide, hospital operating margins average a slim 2 percent, the hospital association has said. That means hospitals make, on average, 2 cents for every dollar in patient revenue they collect.

But according to financial information that Maine’s 39 hospitals submitted to the Maine Health Data Organization, a state agency tasked with collecting and reporting health care data, those operating margins average 3.7 percent.

A roughly 4 percent operating margin isn’t lucrative for a nonprofit hospital, falling short of the national average of 5.5 percent, as reported by the American Hospital Association. But it’s nearly double the average the Maine Hospital Association has publicized.

Asked about the discrepancy by the Bangor Daily News, the hospital association compared its numbers, which are based on hospitals’ audited financial reports, with the Maine Health Data Organization’s data. The health organization supplements the hospitals’ audited financial reports with an online template that collects further data from hospitals.

Some of the discrepancy appears to lie with each organization’s methodology, said Jeff Austin, a lobbyist with the Maine Hospital Association. His group uses a fiscal year approach and weighted average, while the Maine Health Data Organization bases its numbers on calendar years, he said.

The health organization doesn’t present a statewide average operating margin in its data. Averaging the individual hospital margins presented on its website yields an unweighted statewide average of 3.7 percent.

The hospital association is trying to learn more about how the Maine Health Data Organization approached the numbers, Austin said.

“We know what we did and we’re still confident our numbers are accurate,” he said.

Karynlee Harrington, acting executive director of the Maine Health Data Organization, said she hasn’t yet had a chance to analyze why her organization’s numbers differ from the hospital association’s.

The Maine Health Data Organization’s $1.5 million budget is funded primarily through an assessment on hospitals, other health providers, insurance companies and third-party insurance claims processors.

“We will get to the bottom of it … We are committed to understanding why there’s a discrepancy,” she said.

The average operating margins came closer when the hospital association adjusted its methodology to mirror the health organization’s, Austin said. For 2010, both groups show a statewide average margin of about 1.45 percent, he said. For 2011, the hospital association calculated a margin of 3.01 percent when it adjusted its methodology. That’s still shy of Mthe health organization’s 3.7 percent.

The two groups also may have accounted differently for revenues and expenses associated with hospital-based physician practices, Austin said.

Hospital financial health

Determining just how financially healthy Maine hospitals are is no simple feat. As is the case with hospitals in many other states, various financial metrics can yield widely differing results.

Often lost in the MaineCare debt debate is the fact that Maine hospitals calculate their operating margins assuming that the outstanding bills were paid. Hospitals typically count the MaineCare debt as revenue because they presume that the state and federal governments will make good on it.

That means hospitals reporting barely positive margins actually are often operating at a loss, the Maine Hospital Association has noted. It also makes the bottom line impact of the debt less clear to those who aren’t well-versed in hospital accounting.

Operating margins are an indicator of how efficiently hospitals are run. While most of Maine’s hospitals have nonprofit status, and don’t pay taxes, margins can be considered a measure of “profitability.”

Additionally, operating margins are just one measure of financial health. They largely reflect how much money hospitals make or lose from treating patients, their primary function. Some hospitals, however, especially larger ones in more urban areas, also bring in sizeable amounts of cash through other areas, such as endowments and investments.

Citing the lack of transparency, Geoff Gratwick, a rheumatologist and state senator from Bangor, plans to introduce a bill that would make a state agency or some other entity publicly accountable for analyzing hospital financial data.

Hospitals’ Form 990s, which most tax-exempt organizations must file with the Internal Revenue Service, are “a sham,” he said.

“990s are good at hiding the truth,” Gratwick said. “I challenge Mr. LePage to understand the 990 of Eastern Maine Medical Center or Maine Medical Center.”

While he didn’t accuse hospitals of deliberate insincerity in filling out the tax forms, Gratwick said the information is so obscure that the average person can’t understand it. He pointed to two “condo fee expenses” of $655,000 on Eastern Maine Medical Center’s most recent Form 990.

“I find ‘The Odyssey’ and ‘The Iliad’ very interesting, but I need help from someone to interpret it for me,” Gratwick said. “And ditto — we need someone publicly accountable to help us interpret this hidden language they’re using.”

The condo expenses are for maintenance of physician and administrative office space in the Webber Building on EMMC’s State Street campus, according to EMMC spokeswoman Tricia Denham. The building is owned by a condo association that EMMC belongs to, she said.

Gratwick added that it’s difficult to consider hospitals nonprofits considering the salaries that some employees earn.

“The whole concept of nonprofit has been distorted,” Gratwick said. “This will get all the CEOs highly irritated, but I don’t think you could call a community organization a nonprofit when the salaries of CEOs are six and seven figures.”

Austin of the Maine Hospital Association countered that compensation for top hospital executives is plainly listed in the tax documents. Hospitals account for less than a third of all Medicaid spending, but release more financial data than nursing homes, surgical centers and other health providers that accept the government money, including other nonprofits, he said.

“There’s far more information about the financial health of hospitals than just about any other private organization in the state,” Austin said. “I think that’s indisputable.”

Costs versus prices

Gratwick also plans to seek greater clarity on how hospitals set prices for medical treatments and procedures.

But prices don’t paint the full picture, said Andrew Coburn, a rural health expert and chairman of the Master of Public Health program at the Muskie School of Public Service at the University of Southern Maine. Hospitals offset expensive but needed money-losing services, such as trauma care, with more lucrative ones, distorting the real costs, he said.

“When financial managers say that you never know the prices of things in health care, that’s why, because there’s no clear cost accounting in the pricing of hospital services,” he said.

Hospitals also say the MaineCare debt forces them to shift costs to patients with private insurance — which offers better reimbursement rates — ultimately driving up prices for commercial health insurance premiums. How those costs are shifted and to what extent remains unclear, frustrating many large employers that provide health insurance for their workers, said Elizabeth Mitchell, CEO of the Maine Health Management Coalition.

“The problem is there’s really so little transparency in hospital pricing, we just don’t know the effect of underpayment or nonpayment on hospital pricing and cost shifting,” she said. “There’s growing awareness of the need, the urgency, for transparency into health care costs and hospital pricing.”

Employers agree that hospitals should be paid the outstanding MaineCare debt, but they also want to know how their rates would be favorably affected once hospitals have the money, Mitchell said.

While the Maine Health Data Organization historically has only reported financial data, its board has wrestled for years with whether to expand its mission to include analysis, Harrington said. The organization has received feedback that its data — on pricing, hospital financial performance and health care quality — is hard to understand, she said.

“Raw data is meaningless to many people that don’t have the resources to hire somebody to do the analysis,” Harrington said. “At the same time, the analysis is extremely expensive … We have limited revenue, there’s no desire to increase our funding, so we’re trying to figure out out how to balance it all.”

BDN Business Editor Whit Richardson contributed to this report.

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