Industry study finds income lags for Minnesota's rural hospitals

It can be a tough business running an independent hospital in rural Minnesota.

A new report from the Minnesota Hospital Association shows that rural hospitals repeatedly lagged those in urban areas in terms of median operating income from 2012 to 2015.

The report released this week included specific results for 70 health systems across the state, and found that 21 lost money on operations during 2015. None of the money-losing hospital systems was based in the Twin Cities metro.

Rural hospitals face a number of challenges, analysts said, including a larger share of patients covered by government health insurance programs that don't pay hospitals as much for services as commercial health plans.

"Our biggest concern would be the rurals are not keeping pace," said Lawrence Massa, the president of the Minnesota Hospital Association. "They made some improvement, certainly, in 2015, but it's something we need to keep an eye on."

The report released this week is the trade group's first on the financial health of hospitals and health systems in Minnesota. The hospital association says it expects to issue annual updates.

Three small hospitals in the northwest Minnesota communities of Hallock, Mahnomen and Warren had the worst financial performance in terms of operating margins, according to the report. All three hospitals lost more than 10 cents for every dollar of revenue.

"You've got some very small and stressed hospitals," Massa said.

Independent hospitals in rural Minnesota don't have enough patients to offer specialty services that can generate higher profit margins, said Allan Baumgarten, an independent health care analyst in St. Louis Park. Free-standing hospitals in rural areas often lack capital for investments that can help recruit and retain physicians, Baumgarten said.

Even so, the urban/rural divide has become less helpful as a way to understand the financial performance of hospitals, Baumgarten said. In recent years, several hospital systems based in Minnesota's largest communities have made a business out of running hospitals in small towns.

"Why do hospital systems like Sanford or Mayo invest in operating these small hospitals?" Baumgarten asked. "Part of it is, they want them to be feeders to their hub hospitals."

Rochester-based Mayo Clinic posted 2015 operating income of $534 million — the biggest sum on the hospital association's list. South Dakota-based Sanford Health posted operating income of $195 million.

He pointed to data from Standard & Poor's showing median operating income at 3.4 percent for hospitals across the country.

The operating margin shows the relationship between a hospital's revenue and expenses.

Hospitals with positive margins are paid enough for providing care that they have extra money beyond their expenses — sums that could be characterized as income or profit. Medical centers with negative margins, by contrast, don't generate enough revenue to cover all their expenses, and therefore lose money on operations.

The operating income and loss figures don't factor the sums made or lost by hospitals outside patient care, such as through investments and philanthropy.

From 2012 to 2014, urban and rural hospitals saw a divergent trend in terms of operating margins, according to the report, with margins improving at urban hospitals and worsening in rural areas. The opposite held true in 2015 — rural hospitals closed the gap, but didn't eliminate it.

"Rural hospitals were able to improve their margin in 2015 by focusing on growth in outpatient services and improved collections," the report said. "From 2011-15, hospitals in the northern regions of Minnesota — where the population density is lower and there are fewer hospitals — had predominantly lower and negative operating margins."

Christopher Snowbeck • 612-673-4744

Twitter: @chrissnowbeck