Hospitals take on building projects despite MaineCare debt

Eastern Maine Medical Center in Bangor recently revived plans to construct a seven-story tower at its State Street campus as part of a $250 million project described as the largest ever undertaken by the hospital’s parent organization.
Courtesy of Eastern Maine Medical Center
Eastern Maine Medical Center in Bangor recently revived plans to construct a seven-story tower at its State Street campus as part of a $250 million project described as the largest ever undertaken by the hospital’s parent organization.
By Jackie Farwell, BDN Staff
Posted March 31, 2013, at 6:44 a.m.

As drivers pass through Augusta on Interstate 95, Maine’s newest hospital comes into view just off Exit 113. Four stories of brick and gleaming glass now stand in what was once a grassy field, a $322 million project just months away from opening to patients as the Alfond Center for Health.

Just a few miles away, lawmakers continue a heated debate about how to repay Maine’s hospitals $484 million in overdue Medicaid bills dating to 2009. Hospitals have stressed the debt’s consequences — from layoffs to frozen wages to eliminated services — in pressing legislators to make good on the state’s long-standing IOU.

Yet a brand-new hospital still managed to be built in Augusta. Two of the state’s other large hospitals in Bangor and Portland also have embarked on multimillion-dollar construction projects.

All three hospitals have financed their projects without assuming that the state will repay the debt, as Gov. Paul LePage has vowed to do. Each pulled together enough capital and loans to get the projects off the ground, even as they’re waiting for Maine to pay up on tens of millions of Medicaid dollars.

Hospital executives say the projects represent needed upgrades that will better serve patients. Others question whether hospitals are being held accountable for all the growth, including employers frustrated by the higher costs that often follow.

Moving forward without MaineCare money

LePage wants the state to pay its $186 million share of the Medicaid debt, which would trigger a federal match of $298 million.

The debt piled up as hospitals served patients covered by MaineCare, Maine’s version of the Medicaid health insurance program for the poor, without being fully reimbursed by the state, which splits the bill for the program with the federal government.

While LePage and lawmakers remain at odds over how to repay the MaineCare debt, there’s no debate that the state has run up a hefty tab. Hospitals also are giving away more charity care and racking up additional losses from patients who can’t pay their medical bills.

Still, hospitals have managed to stay open and in many cases expand. Maine hospitals employed about 36,000 full- and part-time workers in 2011, a jump of about 2,400 from 2007, according to a January report by the American Hospital Association.

As the state fell short on its MaineCare payments, hospitals shifted the burden of those unpaid medical bills to people with private health insurance — namely, Maine’s employers, said Wayne Gregersen, who oversees employee health benefits at The Jackson Laboratory in Bar Harbor.

That “hidden tax” on employers has kept Maine’s hospitals out of debt, he said.

“When they get those overdue hospital payments, they’re just going to be floating in money. … As far as I’m concerned, they’re getting paid twice,” Gregersen said.

The MaineCare debt and other uncompensated care have stretched hospital budgets, in some cases leading to layoffs, 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. At the same time, hospitals in Maine, like others across the country, are beefing up their equipment and facilities to maximize the most profitable services in order to stay competitive, he said.

Hospital community boards, which often include employers concerned about rising health insurance costs, are no longer rubber-stamping expensive infrastructure projects, having grown wise to the higher insurance premiums that can result down the road, he said.

Beyond local oversight, however, Maine lacks a statewide strategy for divvying up its health care dollars in ways that best serve the public, Coburn said. The question of whether more infrastructure — whether it’s a new hospital or a parking garage — will lead to better value in health care is being asked across the country, he said.

“We have a health care system where the hospitals are a very dominant player in all aspects of health care finance and delivery,” he said. “The whole question of how we’re going to maintain accountability, above and beyond what community boards do, is a major public policy question in this state. We don’t have a competitive health care system, and we’re not going to have a competitive health care system anytime soon.”

Many question whether the certificate of need process, which regulates the expansion of health care facilities in Maine and many other states, is effective, Coburn said. Most proposed projects are recommended for approval, he said, and studies show that the programs have no effect on the growth of health care costs.

Maine already has far more health care infrastructure than it needs to take care of its residents, Gregersen said. While some projects may be justified — to update badly deteriorated buildings, for example — employers that provide health insurance often pick up the tab for growing hospital square footage through higher health premiums, he said.

“Because we have that excess infrastructure, we can never lower our costs,” Gregersen said. “As long as those buildings are there, they’ll be populated, they’ll see patients, and we as employers are going to have to pay the bill. Even though that extra infrastructure is not really adding to the quality of care here in Maine.”

The Jackson Lab, like many of Maine’s larger employers, is self-insured; it assumes the financial risk for providing health benefits to its employees rather than contracting with an insurance carrier.

Hospital projects

Eastern Maine Medical Center in Bangor recently revived plans to construct a seven-story tower at its State Street campus as part of a $250 million project described as the largest ever undertaken by the hospital’s parent organization.

EMMC is saddled with the highest single tally of Medicaid debt at more than $75 million, including both the state’s share and the federal match.

The hospital determined that it had the financial wherewithal to move ahead with the tower even if the state doesn’t repay the Medicaid debt, according to EMMC executives. The debt was a major factor, along with the worsening economy, in delaying the tower project, which was first approved by the state in 2008, they said.

The project will allow EMMC — which serves more than a third of the state’s population as the only provider of many specialty medical services — to operate at its full licensed capacity and modernize operating rooms built 30 years ago, said Dr. James Raczek, the hospital’s chief medical officer.

Plans call for adding more than a dozen operating suites, boosting the number of private patient rooms, updating cardiac and obstetrics services, and relocating the neonatal intensive care unit. Hospital administrators see the project as a way to replace and update existing infrastructure, not so much as an expansion.

“If we had that [Medicaid money] in the bank, this project would be easier for us to finance. … It’s caused us to have to borrow more money, which in the long run leads the project to have more expense,” Raczek said.

In awarding its eighth-highest rating to EMMC’s first round of bonds for the project, Moody’s credited the hospital’s consistently improving operating margins, but also cited the delayed MaineCare payments as a challenge.

EMMC, like its counterparts in Augusta and Portland, will rely heavily on loans for its project.

The hospital plans to borrow $194 million, but it also has been able to set aside $75 million in equity. The remaining $20 million will be collected through fundraising.

Meanwhile, MaineGeneral Health is building its new hospital in Augusta, a project that also includes renovation of a Waterville outpatient center. Like EMMC, MaineGeneral didn’t count on the MaineCare money being paid back when it laid out financing for the project.

MaineGeneral Medical Center is owed nearly $45 million in past MaineCare debt.

The hospital project never would have gotten off the ground if MaineGeneral hadn’t lined up funds, mostly loans, to cover the full cost of the project without counting on repayment of the MaineCare debt, said Chief Financial Officer Michael Koziol.

“If I had to rely totally, or a portion, that the state was going to pay the money, I probably wouldn’t have gotten my financing, because it was an unknown,” he said.

The planned 640,000-square-foot hospital is slated to open Nov. 9. The four-story facility will replace three smaller, aging MaineGeneral facilities in the region — the former Augusta General Hospital, the Seton campus in Waterville, and the Thayer building in Waterville, which will convert to an outpatient facility with an emergency department.

“It looks nice that we’re building a brand new hospital, but at the same time we’ve consolidated services,” Koziol said. “We’ve reduced the overall cost of health care, we believe, in the state by doing consolidation. So yes, on the one hand, yeah, it’s a nice new building, but on the other we made hard choices to bring buildings together, to bring inpatients together in one location.”

MaineGeneral expects to contribute $35 million in equity to the project. The remaining $287 million will be financed with long-term debt, $35 million in grants from the Harold Alfond Foundation, and donations.

In Portland, Maine Medical Center is owed more than $67 million in state and federal MaineCare debt. The hospital also has a construction project in the works, though on a far more modest scale than its counterparts in Bangor and Augusta.

Maine Medical Center notified the state in September that it’s planning a $40 million expansion and update of several of its operating rooms.

The existing operating rooms date to 1984, and at about 400 square feet, aren’t large enough for many modern surgeries, an MMC official said in September. The new 650-square-foot rooms will be known as “interventional rooms” that can house not only surgeries, but also other services as needed, such as radiology and cardiac catheterization.

The project will be fully financed with a loan.

Larger hospitals claim the Medicaid debt issue will cost them more to borrow money. Standard & Poor’s, the largest rating agency, seems to agree. Last May, S&P maintained an AA- rating for MaineHealth, Maine Medical Center’s parent system, which indicates a low credit risk. But the rating agency also cited the MaineCare debt in giving MaineHealth a negative outlook, a sign that S&P questions the system’s creditworthiness moving forward.

“Can you imagine Hannaford or Shaw’s providing food for food stamps but not getting paid the cost of the food? That’s unthinkable in that world, but that’s what’s happening here,” said Al Swallow, Maine Medical Center’s vice president of finance.

Struggling hospitals

Several other factors are also weighing on Maine’s hospitals, including the weak economy, upheaval resulting from national health care reform, and Medicare cuts outlined as part of federal deficit reduction plans. The Maine Hospital Association has acknowledged that the Medicaid debt is just one of many pressures affecting its members.

Portland’s Mercy Hospital, owed $24.4 million in MaineCare funds, recorded losses of $18.4 million in 2011. It has lost money for the past three years after its own major capital project, construction of its $85 million Fore River Campus in 2008. Several rounds of layoffs have occurred since then.

“Hospitals are on the one hand feeling the pinch of changing [patient] volumes and payment sources that they have to work with, including uncompensated care,” said USM’s Coburn. “At the same time, they do have infrastructural needs that they’re choosing to fund for a whole variety of purposes. There is a reality that hospitals need to maintain a degree of competitiveness, quote unquote, in terms of service in order to be able to continue to maintain the volume that is necessary for them to meet their budgets.”

Hospitals located in areas of higher poverty generally treat a greater share of low-income Medicaid patients, said Coburn. That’s often smaller, rural hospitals, which lack endowments that larger hospitals can rely on to access more capital and soften the blow of the MaineCare debt, he said.

“Because [large hospitals] have more money to work with, they can access more money,” Coburn said. “It enables them to do things that smaller hospitals that have very thin margins and very little cash on hand aren’t able to do.”

BDN Business Editor Whit Richardson contributed to this report.

http://bangordailynews.com/2013/03/31/health/hospitals-take-on-building-projects-despite-mainecare-debt/ printed on September 20, 2014