Hospitals plead poverty -- should we help them?

Shawn Doherty  —  12/31/2008 4:01 pm

In Boscobel (pop. 3,334), the connection between the lousy economy and the town's free clinic is direct and heartbreaking. The sick gather in the cold, hours before doors open -- elderly with high blood pressure, middle-aged diabetics, and too many young kids with too many rotten teeth. Some lost their jobs and health insurance when the local electronics factory moved to Mexico. Others are working but too poor to afford the soaring costs of health care.

Asked how she was doing since founding the charity one year ago, director Robin Transo was momentarily speechless. "Oh boy," she said. "Oh boy." Transo spends hours each day begging donors for money. Volunteer doctors stay hours late to handle the dozens of people waiting. Transo has nightmares about the crowds. "We see people coming across the river from Iowa," she said. "We see relatives visiting family in town. People driving from miles away in the country. They just keep coming and coming."

Now the state's biggest corporate clinics and hospitals say they also are being besieged. And hat in hand, they are joining the queue to ask for help from Congress and President-elect Barack Obama, who are crafting a multibillion-dollar economic stimulus package for introduction next month.

So far, Wisconsin's hospitals are doing better than their counterparts in states like Hawaii and New Jersey, where medical centers going bankrupt helped prompt Moody's Investor's Service to downgrade its 12- to 18-month outlook for the industry from "stable" to "negative" in November. But administrators here warn they could be in that kind of trouble too, soon. A report released earlier this month by the Wisconsin Hospital Association claimed that the amount of money the state's hospitals have lost on bad debt and charity care is up nearly 20 percent this year. Without more funding from Uncle Sam, the report said, state hospitals might reduce services, freeze building projects and lay off workers -- measures which would further depress Wisconsin's local economies.

While the hospital association points to such external forces as the recession and inadequate federal funding to explain its financial woes, community activists, politicians, union officials and health care workers argue that other factors -- including extravagant investments in building and technology projects at the expense of hospital charity programs -- also are playing a role. State hospitals, these critics allege, are crying wolf or using the economy as a cover for their own management decisions, or both.

"Certainly the economy hurts. But some of these are self-inflicted wounds," said Stephanie Bloomingdale, director of public policy for Wisconsin's Federation of Nurses and Health Professionals. "We all want hospitals to be reasonably profitable and deliver high-quality services and treat employees fairly, but we've seen some real excesses over the last decade."

Given Obama's vow to fix the country's broken economy and health care system, the complicated health of Wisconsin's hospitals is sure to be a hot issue in 2009. Here are three questions people are asking as they try to come up with a diagnosis and prescription for yet another ailing industry:

For starters, does a nonprofit industry that makes a billion-dollar surplus one year and goes bust the next deserve help?

The health care industry was supposed to be recession-proof. After all, the reasoning went, people will keep having babies and keep getting sick and keep dying. And for many years, Wisconsin's hospitals did keep raking in the dough.

In fiscal year 2007, according to records from the WHA, the state's 135 nonprofit hospitals generated $13.9 billion in total revenues, including nearly $720.4 million in nonpatient revenues made up of mostly endowment and investment income, but also relatively puny gift shop and parking proceeds. After the hospitals paid out expenses -- including nursing salaries, operating costs and charity programs -- they cleared $1.2 billion in total net income. This billion-dollar margin is five times the $241.7 million surplus Wisconsin's nonprofit hospitals earned in fiscal year 1993.

Madison's three hospitals kept pace. The big three ended fiscal year 2007 with a combined surplus -- what other businesses would call a profit -- of $94 million, according to figures provided by the WHA. Meriter Health Services reported a $19 million, or 6 percent, operating margin above expenses, and UW a $32 million, or 4 percent margin. St. Mary's Hospital, as it had in previous years, reported the biggest surplus of all three, with a $43 million, or comfortable 12 percent margin, at year's end.

Turns out those were the good old days. This recession, which is making past downturns look like mere sniffles, is delivering a body blow to hospitals' bottom lines. There is mounting evidence that some people are postponing the elective surgeries and procedures that provided local hospitals with important revenues. At the same time, people who put off routine care are ending up in emergency rooms when the cough or ache they ignored turns into a crisis. (Hospitals are required by federal law to provide emergency care regardless of ability to pay.) UW Hospital and Clinics, for example, treated 3,000 more people in its emergency rooms during fiscal year 2007 than during the year before -- an 8 percent jump -- and Madison's other two hospital emergency rooms have expanded to accommodate increasing demand.

The result is a fiscal squeeze.

Hospital margins in Wisconsin -- the difference between revenues and expenses -- dropped by more than 73.5 percent by September this year, and the total 2008 losses will be much worse given the rocky last few months. Last year, 23 of 134 nonprofit WHA hospitals lost more money than they took in. This year, WHA president Steve Brenton predicted, a majority of the state's hospitals will be in the red. Among them will be St. Mary's, which has suffered a $50 million dent in its investment portfolio this year

"We gave up all our gains of the last two years," said Charlie Johnson, vice president of finance for SSM Healthcare of Wisconsin, St. Mary's parent company. UW reports its margin fell to 1 percent for fiscal year 2008. Spokeswoman Mae Knowles predicted that Meriter also would see some decline in its investment portfolio but had no figures available.

Outlook:

It will be tough to drum up a lot of public support for hospitals right now, given their huge recent surpluses. In comments that echo the debate over bailouts of the troubled financial and auto sectors, critics responded to an online story about the WHA report with complaints about bloated executive pay, and pinched nursing salaries and benefits. (Salaries and fringe benefits for hospital staff decreased from 52.3 percent of the total expense pie in fiscal year 1993 to 47.5 percent in fiscal year 2006, according to WHA statisics.)

"Boo hoo," wrote a reader, who went by the name, "PO'd RN."

"You play the market in these times, and you will lose. At this point, it is about cost averaging. My question is, 'Will the CEO forego her five- to six-figure Christmas bonus this year with the times being what they are?' "

Gov. Jim Doyle seems more sympathetic. Doyle is set to propose, for the third year in a row, a hospital assessment that would be used to leverage hundreds of millions of extra federal dollars for hospitals. Last year, Assembly Republicans labeled the measure a "sick tax" and held it up, but now that the WHA is behind the proposal and Democrats are in charge, it should finally pass, said Doyle spokesman Lee Sensenbrenner. State hospitals are also lobbying to receive additional federal benefits from Obama's stimulus plan.

Are hospitals overspending and overbuilding?

Drive around town and you can see the cranes and other signs of an unprecedented hospital building boom. Over the past decade, hospitals across the state have spent millions in surplus money or donated funds on spiffy new facilities, rankling many who lack basic health coverage. Local hospital administrators retort that they can't win-- if they had not invested in such aesthetically pleasing projects, neighbors and city officials would have had a fit and might not have approved plans. And health care workers acknowledge that their patients expect hospitals to be more like hotels, with nice private rooms rather than the grim institutions of old.

All three Madison hospitals are in various stages of huge building projects. St. Mary's recently completed most of a 10-year, $174 million expansion that has doubled the size of its emergency department; added a new inpatient complex with a rooftop helipad and 75 additional private rooms; and added an outpatient building and a new parking structure.

Meriter is contemplating its own makeover, estimated to cost as much as $170 million, that will include space for a new women's health program, more operating rooms and additional private rooms. That's on top of a recent six-story expansion to the hospital's five-story atrium and waterfall, and a new oncology unit that opened earlier this month. UW recently underwent major renovations, too, and opened a $78 million new Children's Hospital (paid for by donations), which features a miniature movie theater in the lobby and state-of-the-art private rooms. St. Mary's parent company is also planning to build a $70 million hospital in Janesville and an emergency room facility in Sun Prairie, and a handful of new clinics have popped up in town, including Meriter's medicine-on-the-go clinics in local Shopko stores. "There's been a huge hospital building boom in this state," said Robert Kraig of Citizen's Action Now. "These places are more like palaces than hospitals. And now they turn around after this building spree and say they need money?"

State Senate Majority Leader Russ Decker, D-Weston, who has repeatedly proposed legislation that would regulate hospital billing and building, blames overbuilding for high health care costs and wobbly hospital finances. "Hospitals are just building one on top of the other and competing with each other, and we all end up paying more," he said. Local hospital rates have shot up every year (in 2006, room rates jumped 9.9 percent at St. Mary's, 7.5 percent at Meriter, and 6.5 percent at UW). But administrators say the expensive expansions were needed to replace deteriorating facilities and upgrade outdated equipment. They point to high occupancy rates and say hospitals must keep up with Dane County's graying baby boomer population. "Many things we're doing are not excessive, but necessary to maintain standards of patient care," said Meriter's Knowles.

An example, she said, is the shift from paper patient charts to computerized records. Only last year, most patient information -- from nurses' notes to doctors' orders to lab results and pharmacy prescriptions -- was scattered in various charts at different facilities. Now, clinics and hospitals in the area have invested in electronic technology systems from rising star Epic in Verona that will transform medical record keeping the way the ATM card transformed banking. All three Madison hospitals are wiring into the state-of-the-art medical technology, which can easily cost $30 million to $50 million.

A local health care consultant, who asked to remain anonymous, claimed there has been "waste," budget overruns and inefficiency as local hospitals purchase these new systems, train staff and make mistakes. Administrators disagree. "It's been a significant investment. But there is going to be a big payback," said UW's Mark Kirschbaum, senior vice president for quality and information. "We're in the forefront of what's going to happen nationally."

Outlook:

Decker won't need to propose his building freeze again this year; the economy will do it for him. Just this week Madison-based Erdman, a health care facility design and construction firm, announced layoffs. The WHA survey found that two-thirds of hospitals are thinking of scaling back or canceling building projects. But electronic information technology is safe, especially since Obama has called for all hospitals to adopt the systems as a way to reduce costs in the long run, and improve efficiency and safety.

Do the state's tax-exempt nonprofit hospitals give enough back to the community?

Old books kept by the Franciscan Sisters who founded St. Mary's in 1912 show the initials ODL next to the names of most patients. They stood for Our Dear Lord's and meant that the nuns were providing free care. Today, just like many other nonprofit hospitals in Wisconsin, St. Mary's devotes less than 2 percent of its net patient revenues to charity care.

Yet the country's early hospitals were established to serve the poor. "Doc" visited the middle class and wealthy in their homes, delivering babies and operating on kitchen tables. The first urban hospitals were small, often religious or government-run, and operated hand-to-mouth just the way the free clinic in Boscobel still does. "I have no margin at all," Transo said. "We take everybody. We have people walking in here with cancer the hospitals have turned away."

Critics say that as hospitals have grown up and become more corporate -- and profitable -- too many have lost sight of their original mission. Or worse, they serve the poor -- with collection notices. Over the past five years, various lawsuits, state lawmakers and justice officials, and the IRS and Congress have all put the charity care and debt collection practices of nonprofit hospitals under scrutiny. In 2006, a congressional investigation determined that there is little difference between the way nonprofit and for-profit hospitals run their businesses and provide free and discounted care -- even though nonprofit hospitals enjoy billions of dollars in tax breaks.

In Wisconsin, 92 percent of hospitals are classified as nonprofit, a bigger share than in most other states. That means that in return for vaguely defined "community benefits," they are exempt from paying property, income and some sales taxes. A recent study by the Institute for Wisconsin's Future estimated that the property tax exemptions alone totaled at least $117 million and probably much more than that, since many tax records are so old that they don't include recent improvements. A similar analysis done by a union group focused just on St. Mary's. It included sales and corporate as well as property taxes, calculating that if St. Mary's paid them, the city of Madison and Dane County would gain an extra $22 million a year. "Do the hospitals give enough back to the community?" Bloomingdale asked.

Hospitals say they do. Wisconsin hospitals provided $809 million in uncompensated care to 871,188 patients in fiscal year 2006, a figure that represents 3.4 percent of gross patient revenues and includes $389 million in charity and $420 million in bad debt, according to figures kept by the WHA. In Madison, UW contributed the second-highest amount to charity care in the state. It paid $26 million -- 2 percent of its total patient revenues -- to cover 10,332 cases of charity care. As a share of total patient revenues, however, little sister Meriter Hospital was the most generous in the city, contributing $14.3 million in charity care, or 2.7 percent of total patient revenues, for 10,587 cases of charity care. St. Mary's handed out $8.4 million or 1.5 percent of patient revenues, for 2,025 cases. All three hospitals wrote off (or pursued and harassed patients to collect, depending on who you talk to) huge amounts of bad debt as well in 2006, with UW reporting nearly $13.5 million, St. Mary's nearly $7.9 million, and Meriter $6 million. George Quinn, a senior vice president at WHA, says state hospitals provide millions more in community benefits, including free screenings, immunizations, education programs and support for free clinics. "Hospitals provide a safety net for people who need it," Quinn said.

Outlook:

Whether the safety net is big enough will remain a key issue in 2009. Even some hospitals admit it is time to slow down and ask if they're doing enough. St. Mary's Johnson said that national discussion of the issue, as well as several lawsuits filed against hospitals in neighboring states, led officials there to do "some soul searching" and revamp their charity program. Now, every patient who enters the emergency room is automatically given information and applications for the program, said St. Mary's spokesman Steve Van Dinter. Under these new procedures, the hospital more than doubled its charity cases to 3,217 in 2007. The hospital also reined in the common but controversial practice of charging the needy the full or list price for services rather than the discounted price given those with insurance, Van Dinter said. That drives up costs for those who can least afford it and puffs up hospital charity totals.

New tax regulations and forms required by the IRS for 2009 will help make nonprofit hospital finances more consistent, clear and transparent than they have been, which will make it easier for the public to hold hospitals accountable. "Hospitals are nervous. This is a hot topic nationally, and they know that now they will all be under a microscope," said an attorney who specializes in nonprofit law and has worked at a local hospital. Wisconsin medical centers are anxiously tracking developments in other states -- especially neighboring Illinois, where Attorney General Lisa Madigan has taken a couple of nonprofit hospitals to court to revoke their tax exemptions and proposed legislation that would require nonprofit hospitals to provide a minimum amount of charity care equivalent to 8 percent of their operating costs.

sdoherty@madison.com

Shawn Doherty  —  12/31/2008 4:01 pm