After 89 years of charity care, the network of hospitals is charging insurers.
For 89 years, Shriners Hospitals have provided free medical care to children in Minneapolis and around the country. But no more.
By month's end, all 20 U.S. hospitals will be billing insurance companies and charging some families copayments, marking a major shift in the charity's mission.
Shriners leaders say the change is necessary to save the iconic name amid rising health care costs, flat donations and declines in a multibillion-dollar endowment that has been ripped apart by the whims of the stock market.
"We're not a poor organization," said Doug Maxwell, president and CEO of Shriners Hospitals for Children, based in Tampa. "But if we don't make wise decisions now, we won't last."
Those without insurance will still be covered at no cost, but some families with copays may have to pony up. The federal government will allow Shriners to waive copays and deductibles for Medicare and Medicaid, which make up about 40 percent of patients.
Shriners Hospital for Children-Twin Cities, a 40-bed orthopedics hospital in Minneapolis, began billing insurers in April as part of the nationwide rollout.
Proceeds from insurance are expected to fund less than half of Shriners Hospital operations, said Charlie Lobeck, administrator of the hospital. The organization will continue to rely on financial support from gifts, donations and endowment earnings.
"Insurance payments are not going to replace those funding sources," Lobeck said. "But they do enable us to reach out to more kids, offer more services and continue to have specialized programs that aren't always funded by health plans and traditional medicine."
The Shriners are a worldwide fraternity of about 325,000 members, whose red fez hats, college football games and circus shows are as much a part of their history as hospitals.
Shriners began opening hospitals in the early 1920s in response to the polio epidemic, and soon established several burn centers. The Minneapolis hospital opened in 1923, the third of what were then known as Shriners' "hospitals for crippled children."
The bulk of the hospitals now specialize in orthopedic care of muscles, bones and joints. But centers also treat spinal cord injuries and cleft lip and palate.
Including sites in Mexico City and Montreal, Canada, Shriners Hospitals have served more than 1 million children to date.
New funding streams
The changes afoot at Shriners Hospitals are part of broader trends in philanthropy.
"We've seen a lot of nonprofits looking to diversify their income streams to become more stable over the long term," said Christine Durand, a spokeswoman for the Minnesota Council of Nonprofits. "That was a trend for a number of years, even before the recession. Some are becoming quite creative with their fundraising campaigns, making use of social entrepreneurship business models and seeking out more diverse individual donors."
Shriners decided to collect insurance payments after watching the value of the endowment that funds the hospitals plunge from $8 billion to about $5 billion between 2007 and 2008. Donations also dwindled as the Great Recession kicked in.
Leaders considered shuttering eight hospitals before settling on an alternative plan to have insurers kick in.
"A lot of our patients have advocated over the years that we begin to collect it," said Lobeck. "They said, 'This is what our insurance is for.'"
The organization has battled financial troubles for nearly a decade. The financial markets played havoc on investments in the 2003 downturn as well, but more fundamental changes in health care have strained the Shriners' business model of running expensive, free standing surgery centers and hospitals beds.
Costs have risen as more sophisticated treatments became available, while those same medical advances meant that more children could be treated in outpatient settings.
In 2003, the Shriners' Twin Cities location was slated for closing. It was filling just 22 percent of the beds in a $23 million facility that opened in 1990. The hospital was spared the knife after an emotional vote during the Shriners' annual convention, held that year in the Twin Cities.
Lobeck said the hospital, with an annual budget of $20 million, is on much firmer footing these days, though no one is out of the woods.
Recent gains on Wall Street have helped the Shriners' endowment recoup some of its recession-time losses, and hospitals were given a modest increase in funding for 2011. But the organization continues to overspend its revenue by $230 million a year to keep the lights on, buy medical supplies, pay doctors' fees and plan fundraisers, Maxwell said.
"That is not a good business practice," he acknowledged, "Unless corrected it will not ensure the infinite longevity of Shriners Hospitals for Children."
The transition to collecting third-party payments for care has not been without stumbles. Shriners had intended to cover copays and deductibles, but ran afoul of state laws and insurance contracts that forbid routine waivers for people covered by commercial insurance.
Shriners was unable to sign contracts with major insurers such as Aetna and Blue Cross and Blue Shield until its bylaws could be changed this month to allow collecting money for services. In the past, even if a patient wanted to write a check for a copay, hospitals could not accept it.
Additionally, Shriners Hospitals learned that insurers were sending checks directly to patients for "out-of-network" costs. While patients were supposed to reimburse Shriners Hospitals, only about a third did so, Maxwell said, a mistake worth "a few million" in uncollected billings.
Maxwell, who ran a manufacturing company for 35 years, said he aims to control costs and find creative ways to help Shriners Hospitals adapt.
Many may no longer serve as stand-alone hospitals providing specialty care.
In Springfield, Mass., the hospital is considering opening its orthopedic facility to Baystate Medical Center so children can also get treatment for diabetes and ear, nose and throat issues.
In St. Louis, where a $170 million facility was set to break ground in the fall of 2008, Shriners instead funded two operating rooms in St. Louis Children's Hospital, where costs are shared for inpatient and outpatient care.
The Twin Cities Shriners Hospital considered an arrangement last year to move into the top floor of the University of Minnesota Amplatz Children's Hospital and have the University of Minnesota move into the Shriners' vacated building.
A deal fell apart because of complex and expensive technical hurdles to coordinate electronic medical records, Lobeck said.
But it's a sign of how times are changing.
"Historically, we've been free-standing and self-contained," Lobeck said. "In the new world, you want to be connected and sharing resources and ideas with each other. ... It isn't going to work the same way it did 20, 30 or 40 years ago."
Jackie Crosby • 612-673-7335