June 14, 2010 | last updated May 29, 2012 8:04 pm

Hospitals Seek Tourniquet | Bleeding Must Stop, Executives Say

The economic downturn has wreaked havoc on the finances of Connecticut hospitals, forcing the state's not-for-profit health care providers to rethink the way they do business.

Significant losses from investments, a source of income many Connecticut hospitals rely on to pay for current operations, coupled with poor reimbursement rates, fewer insured patients, and increased pension obligations have sent operations at about half of the state's 30 hospitals into the red, according to the Connecticut Hospital Association.

Total assets for 29 Connecticut hospitals dropped from $5 billion in 2007 to $3.7 billion in February, a $1.3 billion decline that was spurred largely by shirking endowments and investment losses. That has squeezed margins and forced hospitals to cut staff, freeze salaries and reduce spending.

The financial performance raises concerns about the fiscal structure of their operations and heavy reliance on investment income, officials said.

"It's not a suitable strategy to rely on investments to pay for current operations," said Stephen Frayne, senior vice president of health policy for the Connecticut Hospital Association. "It was a strategy that served hospitals well for a very long time, but its weakness was shown in the last few years. Hospitals need to make more money from operating revenue services."

During normal times, Frayne said, Connecticut hospitals will typically see a $200 million return on their investments. But in 2008, as the markets began to tumble, the state's hospitals actually saw a negative return, which wiped out their operating income for the year and put them in the red with a negative 1 percent margin.

Hospital assets have shrunk further since then, falling to $3.7 billion as of February, from $4.4 billion in 2008.

With an average annual net operating income of $117.2 million over the past six years, it would take Connecticut hospitals more than 11 years to replenish the $1.3 billion in investment losses since 2007, Frayne said.

Hospitals in other states typically rely less on investment income than Connecticut hospitals, and nationally, hospitals are operating in the black by more than 4 percent. The margins for Connecticut hospitals average 2.16 percent.

The Eastern Connecticut Health Network, which owns Manchester Memorial and Rockville General hospitals, along with other medical practices, is about a $280 million operation that aims for an annual margin of 3 to 4 percent, said Michael Veillette, ECHN's vice president of finance. But with a 25 to 35 percent reduction in its investment portfolio over the past few years, along with a rise in uninsured patients and increased pension obligations, its 2009 margin fell to 2.6 percent.

In many years, investment income contributed about a third of ECHN's margin. In good times, the hospital would draw down on those investments to invest in projects.

"Prior to 2008, we probably relied on investment income as much as anyone," said Veillette, who is projecting a 3 to 4 percent margin for 2010. "To see that essentially cut in half over the last few years, we've been forced to make adjustments because we realize it's not something we can rely on."

As the overall value of hospital assets has declined, the situation is affecting the hospitals' relationships with banks and bondholders, who are demanding the institutions hold more cash on hand, and for longer periods of time, to satisfy loan covenants.

"As a result, hospitals are being forced to pull more cash out of operations to satisfy the covenants," Frayne said. "As they pull cash out, they can't invest it in the organization, which is forcing hospitals to postpone expenses necessary to keep the business moving forward. If those assets don't recover, the hospital's ability to borrow in the future will become significantly hampered."

Bristol Hospital, for example, uses income from its endowment to cover debt service, but the portfolio's value shrank by 30 percent over the past few years to about $13 million, said Kurt Barwis, the hospital's president.

"It's stretched us thin significantly," Barwis said. "We use those funds to provide us with comfort levels."

With a heavy reliance on investment income proving to be a feast or famine business model, Connecticut hospitals are focusing on generating more profit from operations, Frayne said.

That includes investing in technology that reduces expenses and increases quality, and trying to secure better reimbursement rates from payers, including state and federal government, and private insurers.

Institutions like Hartford Hospital and ECHN are also taking a page out of the private sector by adopting "lean" principals, a discipline commonly used in manufacturing for streamlining and efficiency.

Hartford Hospital's "How Hartford Hospital Works" program taps all employees to suggest ways to improve services and streamline processes in their particular department, said Jeffrey Flaks, the executive vice president and chief operating officer of Hartford Hospital.

The hospital is reviewing the almost 2,000 suggestions received so far.

Staff in the hospitals' radiation and oncology center, for example, were able to reduce costs by over $30 per patient visit by mapping out the patient experience and reducing wait times. They also discovered other cost cutting measures including converting from films to digital images and eliminating staff overtime by changing the way they schedule and manage shifts.

As a result, patient satisfaction also increased to 99th percentile, Flaks said.

"As time goes forward, hospitals have an imperative to be more efficient, but not at the expense of quality," Flaks said, adding that the hospital has also been able to increase its patient load by 4 percent in 2009, and 2 percent in 2010 with the addition of new programs and services.

Flaks said Hartford Hospital is projecting an operating margin of 1.5 percent in 2010, compared to a loss in 2008.

Bristol Hospital invested $7.4 million in retooling its IT infrastructure to increase productivity, and also added about seven quality control staff who are working to create more efficiency across all departments, Barwis said.

To boost its operational margin, ECHN is undertaking multiple efforts including cutting back certain workers' hours and assessing ways to boost market share within its 19 town footprint.

The hospital also has invested heavily in attacking inefficiencies that result in longer patient wait times and prolonged hospital stays. That reduces expenses, but also increases the likelihood of seeing more patients, helping both sides of the ledger, Veillette said.

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