For Pennsylvania's hospitals, bigger was better last year - at least when it came to making money.
While the overall financial health of the state's 170 general hospitals continued to improve in fiscal 2007, a quarter of them lost money, according to a report released tomorrow by the Pennsylvania Health Care Cost Containment Council. The money losers were disproportionately small, community hospitals in rural areas.
One cause for concern: the amount of uncompensated care - free care to the uninsured poor plus bad debt - rose faster than overall revenue. Uncompensated care was up $74 million, or 12.2 percent, to $678 million.
One of 2007's winners was the University of Pennsylvania Health System, a big player in this region. Its dominant hospital - Hospital of the University of Pennsylvania (HUP) - made nearly $215 million from patient care last year, and $269 million when you add investment and endowment income. The hospital's operating margin - the equivalent of profit on patient care - was 14.28 percent. The total margin, which includes income from other sources, was 17 percent.
Ralph Muller, the Penn system's chief executive officer, said the margins showed that patients were flocking to HUP for advanced cancer, heart treatment and organ transplants. The hospital is full most days, he said, and that is driving higher margins.
Penn is using the money to fund building projects - part of the $232 million Perelman Center for Advanced Medicine will open Monday - and research, Muller said.
The new building, which will be opened in stages over several months, will increase costs, he said, and the weaker economy likely will constrict funding from Medicare and Medicaid, government programs that account for more than a third of HUP's patient revenue. "Given what's happening in the economy right now, those margins can't be sustained," Muller said.
Other hospitals with double-digit operating margins were Fox Chase Cancer Center, Pottstown Memorial Medical Center and three in the Main Line Health system: Bryn Mawr, Lankenau and Paoli.
Paoli, in growing Chester County, had an operating margin of 23.7 percent, the region's highest. It is building a $144 million pavilion that will double its size.
Mike Buongiorno, Main Line Health's chief financial officer, said the hospitals must have strong margins to support $1.2 billion in needed capital improvements over the next five years.
Two of the worst performers in the region were for-profits. Hahnemann University Hospital, which is part of Tenet Healthcare Corp., had an operating margin of negative 18 percent - a loss of $65 million. Roxborough Memorial Hospital, which Tenet sold to Solis Healthcare L.L.C last year, had a negative operating margin of 17.6 percent.
Officials from Solis did not return a call. Ken Villwock, manager of financial analysis for the hospital cost containment council, said hospitals often operated in the red for two to three years after a sale.
The report covers calendar 2006 for Hahnemann, which Michael Halter, chief executive, conceded "was not a good year." Tenet allocates corporate overhead to its hospitals, which makes their performance look worse, he said. Hahnemann made money in 2007, he said, and is on track to make money this year.
When asked if a hospital can make too much money, hospital cost containment council spokesman Joe Martin emphasized the role many hospitals played in their communities.
"For the most part, we've been focused with some relief on the fact that the numbers are going up," Martin said. "The trend is going in the right direction. . . . When hospitals are among the largest employers in the state, you certainly want them to be thriving facilities."
Dan Grauman, president of DGA Partners, a Bala Cynwyd management-consulting firm that has worked with the Penn and Main Line Health Systems, said hospitals wanted margins of at least 5 percent. "I don't know if it's ever too high," he said. Hospitals need money to invest in rapidly changing technology, he said.
Hospitals in Philadelphia have benefited from a shakeout in the market that has left many of the survivors flush with patients, he said.
But Halter, who has argued that private insurers do not pay his hospital as well as some of his competitors, said he thought margins above 7 percent at nonprofit hospitals were cause for soul-searching. "These are huge margins, 14 to 17 percent," he said. "Those are margins you don't even see on the for-profit side of industry. That's like Exxon or something."