Midwest hospitals blast report on profits as misleading, incomplete

The scenic Mississippi River town of La Crosse, Wis., is home to towering bluffs, an enviable quality of life and soaring profits at a local hospital.

That last bit about profits comes from a new study that crowns Gundersen Lutheran Medical Center in La Crosse as the nation's most profitable hospital — but not without protests from leaders at the medical center.

Researchers writing this month in the journal Health Affairs compiled figures showing what they describe as the country's 100 hospitals with the biggest profits from patient care. Others on the list, who also objected, include two Mayo Clinic hospitals in Rochester, a medical center in Duluth and a hospital in Sioux Falls.

Researchers say the results suggest that certain hospitals across the country have market power that gives them leverage in negotiating prices with insurers.

"These hospitals are always the dominant players," said Ge Bai, an assistant professor of accounting at Washington and Lee University. "The private insurers cannot afford to exclude them from their plans."

Hospitals counter that the figures point to a skewed methodology, since the report looks at financial results for individual hospitals instead of larger health systems that post much lower profit margins.

"When you take just one portion of our organization, it is, frankly, distorting what's truly happening for the Gundersen Health System," said Dara Bartels, the health system's chief financial officer. "You're not taking in the whole strategy."

The study found that the median U.S. hospital in 2013 actually lost money on patient care — about $82 per discharge. Hospitals that charged higher prices were more likely to be profitable, researchers concluded.

By virtue of reputation, market share in a community or their position within a larger health system, some medical centers have more leverage than others to command high reimbursements. The link between high prices and high profits might surprise some in health care, researchers wrote, because patients with insurance coverage typically pay in-network rates with negotiated discounts.

"However, in the absence of discounts or charity care, uninsured and out-of-network patients and casualty and workers' compensation insurers often pay the hospital's full charge, which can be in excess of ten times the Medicare-allowable cost," they wrote. "Some hospitals also use high markups as leverage to increase their negotiated price from private insurers."

Overall, hospitals with for-profit status tended to be more profitable, researchers found. Medical centers that treated a greater share of Medicare or uninsured patients, or operated in states with a dominant health insurer, were less profitable.

The study included a barb for nonprofit health systems; seven of the 10 most profitable hospitals in the country, including Gundersen, were nonprofits. "Policymakers may want to consider whether nonprofit hospitals should be required to invest their profits in additional services," researchers wrote, "or lower their prices to justify their tax-exempt status."

St. Mary's Medical Center in Duluth, which is part of Essentia, ranks No. 55 among the most profitable hospitals in the study, with a 2013 profit of $84.7 million. The figures don't include losses in other parts of the Essentia system, Norman said, such as behavioral health programs that routinely lose millions of dollars.

In 2013, the entire Essentia system posted operating income of $29.4 million on $1.65 billion in revenue. "We reinvest all the money," Norman said. "I don't think our rates are any different from the competitors."

The Mayo Clinic's Methodist and St. Marys hospitals in Rochester rank No. 14 and No. 17 on the researchers' profitability list. The Rochester hospitals offer specialized care not available at many other medical centers, Mayo Clinic officials say, which explains the big numbers.

The performance should be considered in the context of the overall system, Mayo argues, adding that any excess funds go back into health research and educational efforts at the academic medical center.

The report lists Sanford USD Medical Center in Sioux Falls as No. 95 in terms of profitability, with income of $65.4 million in 2013. The hospital is operated by the larger Sanford Health system, which that year posted an overall profit that was significantly lower, said JoAnn Kunkel, the system's chief financial officer.

At Gundersen in La Crosse, the study found the hospital had a profit from patient care of $302.5 million in 2013. Bartels, the CFO, says the researchers didn't factor about $219 million in losses that year across Gundersen's network of clinics. Plus, there were significant hospital costs related to administration that didn't show up in the hospital-only financials.

Overall, Gundersen Health System — which includes more than two dozen clinics and a charitable foundation — had operating income in 2013 of $40.5 million on $912.2 million in revenue for a profit margin of about 4.4 percent. The study, meanwhile, calculated a profit margin for the system's hospital in La Crosse at 39 percent.

In protest, Bartels and Dr. Scott Rathgaber, the CEO at Gundersen, submitted a letter to Health Affairs outlining what they described as flaws in the study. "If the authors had looked at a complete set of data, we wouldn't have been on the list," they wrote. "Operating margins for our entire system in the last few years are also in the four to five percent range."

The researchers, however, haven't backed down. They say they don't know of a database with financial statements for all hospital systems in the nation, so they used Medicare data that report hospital-specific numbers.

"In addition, patients go to specific hospitals to receive medical care," wrote Bai and Gerard Anderson, director of the Center for Hospital Finance and Management at the Johns Hopkins Bloomberg School of Public Health. "We believe, therefore, that the hospital is the appropriate unit to analyze."