Recession afflicting metro-area hospitals

A year ago St. John's Hospital in Maplewood was enjoying 85 percent occupancy, its beds filled with patients from the fast-growing northeast suburbs. Business was so good the hospital planned a $68 million addition to expand its emergency and maternity departments and add operating rooms and parking.

No longer. Last summer, the volume of patients began falling across the board, even in the emergency room. Admissions are down 10 percent.

Then the credit crunch hit. Lenders got squeamish and interest rates soared. That expansion project? Shelved indefinitely.

Twin Cities hospitals didn't need national number crunchers last week to tell them the country's been in a recession for a year. They've experienced it firsthand in falling patient numbers and rising bad debt.

But a freeze-up in the nation's financial markets has compounded their woes. Although most hospitals operate as nonprofits, they are capital-intensive businesses that rely heavily on credit markets to finance big-ticket investment in new wards, surgical suites and costly diagnostic technology. Several hospitals, operating on razor-thin margins, have seen interest rates on their debt soar in the last six months even as millions of dollars evaporated from their investment portfolios.

"This has been a very, very rough year for Twin Cities health care," said Bob Gill, chief financial officer of HealthEast Care System, which owns St. John's. Another hospital in the same chain, Woodwinds Health Campus in Woodbury, is deferring a $100 million-plus expansion project.

Minnesota hospitals aren't alone. Last month Moody's Investors Service revised its outlook for the nation's not-for-profit health care sector from stable to negative, citing falling surgical volumes and rising charity care and bad debt.

For Twin Cities-area hospitals, the drop in business comes after an era of expansion in anticipation of aging baby boomers. Now hospitals are shifting gears into a period of cost-cutting.

The market leader, Allina Hospitals and Clinics, and the No. 2 hospital network, Fairview Health Services, recently eliminated hundreds of jobs and are delaying nonessential maintenance. Park Nicollet, which owns Methodist Hospital, is cutting back spending on equipment and maintenance projects.

Last week, Park Nicollet Chief Executive David Wessner sent an internal memo to employees warning that the hospital and clinic chain would lose more than $20 million next year if it didn't take immediate action. Wessner said he would reveal a recovery plan this week that would include focusing on high-margin, high-growth services and discontinuing some others. He also said there would be job reductions.

Part of the problem is that hospitals rely heavily on the bond market to finance expensive buildings and buy state-of-the-art equipment. In this market, with liquidity scarce, not only is it more expensive to borrow, but some hospitals with variable-rate loans have found interest rates soaring on their existing debt. At one point, with no buyers for new debt, they were unable to refinance.

Fairview, for example, saw interest rates on some debt jump from about 4 percent at the beginning of the year to around 9 percent before it managed to refinance about $520 million in early November at a fixed rate of 7 percent. Fairview also managed to sell $222 million in bonds at the end of October, of which the bulk went toward the University of Minnesota Children's Hospital project.

Rural cushion

Some hospitals, cushioned from the slump in revenue, are faring better than others. Rural hospitals, for example, have seen stable patient volumes. They're also insulated because the federal government pays small, rural hospitals differently from metro hospitals to make sure they stay open. As a result, rural hospitals now have fatter operating margins than metro hospitals: between 4 and 6 percent, compared with 1 percent for metro hospitals, said Lawrence Massa of the Minnesota Hospital Association.

Even in the Twin Cities, Regions Hospital in St. Paul saw inpatient admission go up 6 percent, helped by new partnerships with western Wisconsin hospitals. Allina Hospitals and Clinics, the Twin Cities' biggest group, had small increases in inpatient admissions and outpatient visits.

Many hospitals, however, are feeling the recession much the way other businesses are. Hospital officials say they think patients are deferring care because they've lost their jobs and medical benefits. Those who still have insurance are facing higher deductibles and higher copays and co-insurance, causing them to think twice about going to the doctor.

Patients who do get care are leaving a growing pile of unpaid bills. Hennepin County Medical Center (HCMC) expects a rise in uncompensated care to $47 million this year from $42 million last year. That includes charity care to the uninsured as well as bad debt incurred by the so-called underinsured, or people who face high deductibles or copays and co-insurance.

HCMC, which hasn't experienced a drop in patient volume, long has had procedures to help uninsured patients enroll in public programs. Now it's the other metro hospitals that are feeling the rise in unpaid care. "Now our competitors are calling us," said Chief Financial Officer Larry Kryzaniak.

No portfolio

HCMC will go ahead with plans to renovate critical-care units at a cost of $40 million, Kryzaniak said. It will also proceed with expanding its primary care clinics, for which the county has already committed $30 million. Kryzaniak said he's lucky he doesn't have to worry about what the stock market is doing to HCMC's investment portfolio; it doesn't have one.

At the Mayo Clinic, which occupies a unique position because its Rochester complex draws patients from around country and the world, the picture is more mixed. Patients worried about fuel prices and the economy were less willing to travel this year and more likely to have tests and other procedures performed closer to home, said Shirley Weis, Mayo's chief administrative officer. However, Mayo hasn't experienced a big change in its business overall, and volume was up between 2 and 3 percent this year.

But Mayo, with the richest investment portfolio of the hospital groups, also had more to lose in the financial market meltdown. Its long-term portfolio of $3 billion was down 14 percent through October.

The big question for hospitals is whether the downturn is a blip or something more protracted.

St. John's may have put off its big expansion, but it will continue to make some small investments.

"I don't want to call it patchwork," said Gill, "but it's some temporary fixes."

He said he's optimistic the industry will rebound. He just doesn't know when.

Chen May Yee • 612-673-7434