Southern Arizona’s Carondelet Health Network continued to lose money last year, and its plans for a multimillion-dollar health clinic in Sahuarita have stalled.
The Catholic nonprofit’s hospitals — St. Mary’s and St. Joseph’s in Tucson and Holy Cross in Nogales — had losses in fiscal year 2013 that totaled $32 million, Carondelet reported to the Arizona Department of Health Services.
Operating margins for Southern Arizona hospitals were generally low in the 2013 data recently released by the Arizona Department of Health Services. They ranged from negative 11.9 percent for Carondelet’s Holy Cross in Nogales to positive 4.5 percent for the University of Arizona Medical Center’s university campus.
Carondelet’s overall losses are far smaller than in the previous fiscal year, when it lost $100 million, and network officials are hopeful for a more prosperous future as more Arizonans gain health coverage under the the Affordable Care Act.
Yet financial pressure on nonprofit hospitals is accelerating, a recent Standard & Poor’s report says. Patient volume is declining with a growing emphasis on prevention and outpatient care.
Total admissions at Carondelet hospitals fell from about 41,100 in 2008 to 29,000 in 2013, annual financial reports filed with the state health department show. Operating revenues dropped from $547 million to $436 million in that period. (The St. Mary’s behavioral health unit is excluded from both year’s totals because 2013 figures aren’t available yet.)
Total admissions at all Tucson hospitals dropped 10 percent between 2007 and 2012, the state data shows.
In addition to lower volume, a dip in government funding has drained hospital coffers. Federal dollars also come with more conditions than they used to, like value-based reimbursements that factor in readmissions and patient satisfaction.
Hospitals in low-income areas are suffering because they typically deliver more uncompensated care, said Leslie G. Eldenburg, a professor of accounting at the University of Arizona’s Eller College of Management, who researches hospital and health-care cost and accounting issues.
Most provisions of the Affordable Care Act, including mandatory health insurance, took effect this year. And the law’s effect on hospitals’ bottom lines remains a question mark, Ron Patrick, chief financial officer for Northwest Medical Center, said in a written statement.
Operating margins for Arizona hospitals are generally lower than for the rest of the country, said Greg Vigdor, president and chief executive officer of the Arizona Hospital and Healthcare Association.
That’s due, at least in part, to AHCCCS cuts and enrollment freezes over the last several years, he said. While the AHCCCS expansion and mandatory health insurance could improve the financial outlook, he stressed that the future is unclear.
“I’ve been doing this for 30 years,” he said, “and this is the most uncertain I’ve seen in my whole career.”
Glimmers of optimism
It is unusual for hospitals to sustain losses as high as Carondelet’s, Eldenburg said.
The Star made several attempts to interview Carondelet’s Chief Financial Officer and Executive Vice President Alan Strauss during a three-week window this month, but Strauss said he was unavailable. He provided an emailed statement but declined to answer follow-up questions.
Reporters also forwarded to Carondelet the financial data included in this story, seeking confirmation of their accuracy. In response, spokeswoman Lisa Contreras said in an email, “We do not wish to participate in your upcoming article any further.”
In his statement, Strauss says Carondelet is optimistic about having more insured patients, and that federal reimbursements for Medicaid patients will surpass the cost of paying for expansion of the Arizona Health Care Cost Containment System (AHCCCS), Arizona’s Medicaid program. As of Jan. 1, the program restored its coverage of childless adults. The Affordable Care Act also raised income-eligibility limits for enrolling in AHCCCS.
“Both of these factors are early indications of good news for health-care systems that have struggled in recent years with the impact of lower reimbursements and the increase in the uninsured population,” Strauss wrote.
Increasing the number of insured Arizonans should boost elective surgeries and cut all hospitals’ bad debt, said Tucson Medical Center’s chief financial officer, Steve Bush.
But he said an increase in patients with coverage plus a reduced burden of uncompensated care will be largely offset by the costs of expanding coverage. Arizona hospitals funded the AHCCCS expansion through a self-imposed assessment fee, which draws down federal matching funds.
That fee will cost Tucson Medical Center up to $10 million in 2014, which will probably equal the hospital’s reduction in uncompensated care losses, Bush said.
At Carondelet, there have been other signs of financial strain:
- Construction on the planned multimillion-dollar Carondelet Health & Wellness Pavilion in Sahuarita, about 15 miles south of Tucson, was to start earlier this year. But no construction is taking place on the 21-acre parcel, and Sahuarita town Mayor
- Duane Blumberg said Carondelet contacted him to say the project would not be built on schedule. The 14,000 square-foot-clinic, which was to focus on primary care, is to be built on Desert Gem Road, on property Carondelet had previously planned to use for a hospital. Those plans were shelved during the recession. Blumberg says Carondelet assured him the company is still committed to building the pavilion. Town Council member Gil Lusk said the delay appears to be related to economic factors. Carondelet officials did not respond to a question about plans for the pavilion.
- In 2012, the health network’s Carondelet Heart & Vascular Institute, which had been a standalone hospital with its own emergency room, moved to St. Mary’s hospital. The 93,000-square-foot building on North Stone Avenue near River is still vacant and a sign on the front door says the hospital is closed. Carondelet officials would not comment on the property’s status.
- Last year the network laid off 40 people at its head office in Tucson. Officials said the layoffs were part of a staff restructuring in anticipation of the company’s 2014 fiscal year.
Officials with Carondelet’s parent company, Missouri-based Ascension Health, did not respond to a request for comment.
DECLINING HOSPITAL VOLUMES
A December Standard & Poor’s report predicts financial strife for nonprofit hospitals because of heightened competition for patients.
Competition is expensive, time-consuming and potentially counterproductive, the report goes on to say, “demonstrating how hospitals are often caught in a difficult situation with opposing incentives.”
Declining admissions have already hurt hospitals’ bottom lines.
“Hospital volumes are down across the U.S. as more patients defer health services due to higher co-pays and deductibles, and because advances in medical treatments make it possible to address more health-care needs on an outpatient basis,” Northwest Medical Center's Patrick said.
And as insurance companies and self-employed employers seek to reduce health-care spending, they’ve pushed patients to seek care in outpatient settings, like urgent-care clinics, instead of costly hospitals, said Bush, of Tucson Medical Center.
In the past 10 years, El Dorado Hospital closed in 2006. In 2012, Carondelet shuttered its Heart and Vascular Institute’s Stone Avenue location and moved the institute into St. Mary’s.
Yet patient volumes at the remaining hospitals are declining or stagnant, Bush said.
“All of the hospitals are fighting for a shrinking market,” he said.
TREND TOWARD CONSOLIDATION
Strauss, of Carondelet, said in his statement that patient-volume numbers are stabilizing. He attributes that to investments in specialized services like cardiovascular, neurology and orthopedic surgery programs.
The hospital is embracing a focus on preventive medicine, he said.
“At Carondelet, we are expanding our service model toward preventive and primary care, working on three focus areas: keeping healthy people well, helping to ‘course-correct’ those who may be at risk, and managing those who are chronically ill so they can lead a healthier life,” he said.
Some hospitals are relieving financial pressure by consolidating, and health systems are buying up independent facilities.
Banner Health, Arizona’s largest health system, operates 14 hospitals in the Phoenix area, plus one in Northern Arizona. It is in the midst of a deal to buy the Casa Grande Medical Center, which filed for federal bankruptcy protection earlier this year.
Created in 1999 through a merger between North Dakota’s Lutheran Health Systems and Phoenix-based Samaritan Health System, Banner Health does not operate any hospitals in Southern Arizona. Company officials would not say whether they plan on moving into the local market.
“As a leading health system, Banner Health has been asked by numerous other health systems or hospitals to engage in discussions about the potential of these organizations to form an affiliation with Banner or to become part of Banner,” officials said in response to the Star.
“At this time, Banner has no comment regarding any such discussions.”
OTHER HOSPITALS STRUGGLING
Both hospitals in the UA Health Network had positive operating margins in the most recent fiscal year, but the current fiscal year is not looking as favorable, said Misty Hansen, the network’s chief financial officer.
The UA Medical Center received federal dollars last year through a program that provided a critical funding source to help bridge the funding gap created by AHCCCS rate cuts and a rise in uninsured patients.
No other Tucson hospitals were part of that Safety Net Care Pool, which also included Maricopa Integrated Health System and Phoenix Children’s. The program ended in December, to coincide with greater health insurance availability through the Affordable Care Act.
UA Medical Center has not experienced the declines in uninsured patients that would make up the full amount of money that stopped coming in when federal Safety Net Care Pool program ended, Hansen said. But that could change if the Affordable Care Act is effective in covering the uninsured.
In addition, the UA Medical Center is shouldering the expenses of an electronic health record implementation. Those costs were incurred in the second and third quarter of the fiscal year.
Hansen stressed that the UA Health Network’s total operating margin was 2 percent, which is lower than its hospitals. The network is the largest nonprofit health entity in Southern Arizona and, in addition to the two hospitals, includes a practice plan and health plans.
Hospitals will have to evolve if they want to survive — and that will mean cutting costs, consolidating services and finding new revenue streams that aren’t based on inpatient admissions, TMC’s Bush said.
“As long as this downward decline in admissions continues, there’s just not enough business out there for hospitals to continue to perform financially in the same way,” he said. “It’s changing the way hospitals exist.”
