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Indianapolis’ Major Health Systems Adding Facilities in Race to Boost Revenues

July 29, 2008

By Daniel Lee, The Indianapolis Star

Jul. 27–Indianapolis-area hospitals have invested more than $1 billion to build new facilities, which have added 20 percent more beds to the market since 2000.

In recent years, they have invested in new outpatient surgery centers and specialty facilities and started for-profit arms that rake in millions.

The building binge is driving up the revenues of some of the hospitals, providing affluent patients — typically those with good health insurance — multiple choices for care.

But, according to financial documents reviewed by The Indianapolis Star, it also is exacerbating differences in the financial health of the region’s four major hospital systems: St. Francis, St. Vincent, Clarian Health and Community Health Network.

The result could mean the demise of some health-care facilities, as those without state-of-the-art facilities are passed over for those with the most modern digs.

For patients, it could mean higher costs as hospitals pass the expense of construction and staffing onto those with insurance.

“When they’re pursuing these expansion efforts, somebody has to pay for it,” said Debra Draper, associate director with the Center for Studying Health System Change, a nonprofit research organization in Washington, D.C., that has studied hospital competition in the Indianapolis market.

Since 2000, the construction boom has added more than 1,000 hospital beds in Marion County and its seven bordering counties, bringing the total to 5,804, according to the Indiana State Department of Health.

Among the region’s four major hospital systems, St. Vincent Health appears to be benefiting the most financially from the building boom. It had a robust 16 percent surplus of its $764.81 million in revenue in 2006, the most recent data available for the nonprofit health facilities. No other Indianapolis system was able to manage even half that margin, though the nonprofit financial reports reviewed by The Star don’t take into account certain for-profit ventures.

Typically, hospitals aim for a 5 percent margin.

To the north of Indianapolis, St. Vincent Carmel Hospital is in the lap of suburban affluence and has aggressively expanded and marketed its services in recent years. St. Vincent Carmel kept 41 percent, or $58.07 million, of its total revenue of $142.91 million in fiscal 2006, according to the most recent government filings. That’s up from a 29.6 percent margin in fiscal 2004.

Even St. Vincent’s flagship hospital on 86th Street, which treats many more poor or uninsured patients than the Carmel hospital, recorded a 16 percent margin, compared with an 11.4 percent margin in 2004.

“We’re in a very good spot,” said Vincent Caponi, St. Vincent Health’s chief executive officer. “We’ve been profitable enough to create the resources to develop programs we think are important.

“At the same time, we haven’t had all the money we need to do everything,” he said.

To remain competitive, nonprofit Indianapolis-based St. Francis Hospital & Health Centers is closing its inpatient Beech Grove facility, while adding a $265 million six-story tower to its hospital on the Far Southside.

St. Francis’ decision to move inpatient services from Beech Grove to Indianapolis will allow the system to create a more modern and efficient facility to serve patients, while retaining some outpatient services in Beech Grove, said St. Francis President Robert Brody.

St. Francis’ parent company, Mishawaka-based Sisters of St. Francis Health Services, had an overall profit margin of 6.5 percent on $1.67 billion in revenues in 2006, according to government filings.

But St. Francis’ operations in Indianapolis haven’t fared as well. St. Francis’ Far Southside, Beech Grove and Mooresville hospitals had an operating surplus of $9.85 million on $508.13 million in operating revenue, with a surplus of less than 2 percent, not counting results from investments.

That’s down from a $41.6 million operating revenue surplus, or a 9 percent profit margin, in 2004.

Patient admissions and surgical procedures at St. Francis also declined slightly from 2004 to 2006.

St. Francis attributes the slide in its margin to a higher percentage of its patients being uninsured or covered by Medicaid or Medicare, which pay hospitals and physicians less than commercial insurance.

Although Brody says the system is “hanging on” and is not in “deep gravy,” he sees a looming crisis for the nation’s health-care system.

“There’s just not enough money in the system the way the system currently operates to sustain health care as we know it today,” he said.

Brody blasts what he sees as “unharnessed competition” among hospitals in the Indianapolis area and refers to rivals’ newly built hospitals as “fortresses.”

St. Francis Hospital has been a fixture in the quiet community of Beech Grove since 1914. The planned closing of inpatient services there has some residents worried.

“It’s been a convenience,” said Kari Eversole, 27, who lives across the street from the St. Francis campus. “My son has asthma, and sometimes he has to get over there immediately.”

New competition

In recent years, Clarian Health has opened new for-profit hospitals in the affluent suburbs of Avon and Carmel. Clarian also has a new $180 million facility planned for Fishers.

Clarian — which operates Methodist Hospital, Indiana University Hospital and Riley Hospital for Children, all in the heart of Indianapolis — had a revenue surplus margin of 3.9 percent, or $67.39 million on $1.74 billion earned in fiscal 2006. That’s down from a margin of 6.3 percent in 2004.

Daniel Evans, Clarian’s chief executive officer, said its new suburban hospitals are designed to help support patient care, teaching and research at the three Downtown hospitals.

“If those succeed, we’ll continue to do well Downtown,” Evans said.

Clarian’s suburban push, however, also is ramping up the competition between it and Community Health Network.

Clarian’s new Fishers hospital will be a short distance from Community Hospital North, which recently underwent a $170 million renovation and expansion.

Community North and Community East together posted a surplus of $42.9 million on $653.56 million in revenue in 2006, a margin of 6.6 percent.

Bill Corley, chief executive officer of Community Health Network, said the North Hospital — located in the more affluent Northeastside — is a strong financial performer, while East roughly breaks even.

“That’s why we’re not-for-profit,” Corley said. “We basically have said, ‘We’re going to make a commitment to serve the needs of the people on the Eastside.”"

But Community also has shifted some assets from its East hospital. Corley said when Community opened its for-profit Indiana Heart Hospital on the North campus in 2003, East lost about $100 million in revenue from cardiac care.

“Hospitals are really dependant on their insured population to give them their margins,” said Dr. David Lee, vice president of health care management for WellPoint’s Anthem Blue Cross and Blue Shield in Indiana, the state’s largest commercial insurer.

Lee said he has heard local hospital executives say they need higher reimbursement rates because of the costs associated with increased competition. “It comes up very directly,” he said.

Back in Beech Grove, Bob Tooley, 75, laments the closing of the St. Francis hospital, where he was born. It’s also where he had his knee and hip replaced and where he sought care when he thought he was having a heart attack.

“It seems like a tremendous waste to me,” said Tooley, who has Medicare and lives 11/2 miles from the hospital. “This hospital has been here forever.”

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