April 16, 2012 | last updated June 4, 2012 12:02 pm

Focus on operating efficiency paying off for area hospitals

Stephen Frayne, senior vice president of health policy, Connecticut Hospital Association
William M. Jennings, CEO, Bridgeport Hospital

For years, Connecticut hospitals have relied on investment income as a key source of revenue to boost slim operating margins that had many of the state's 30 acute care medical centers facing red ink.

But the stock market's uneven performance in recent years has made investment gains more unpredictable, forcing a sea change in the way hospitals are doing business.

In an attempt to create more stable long-term finances, Connecticut hospitals are focusing on improving operating efficiency, which has led to a wave of merger activity, tense contract negotiations with insurance companies, cost cutting initiatives, and the implementation of new, more efficient ways to deliver health care services.

And the shift appears to be working.

For the first time in many years, Connecticut hospitals saw their average operating margin creep over 3 percent in 2011, to 3.12 percent.

That's up from 2.44 percent in 2010 and 0.96 percent in 2007. Overall, 80 percent of the state's 30 acute care hospitals achieved a positive operating margin in 2011, compared to fewer than half just three years ago, according to data from the Office of Health Care Access.

"Hospitals are trying to make sure revenues from patients are more than enough to cover costs," said Stephen Frayne, senior vice president of health policy for the Connecticut Hospital Association. "In the past, you would have seen lower operating margin and more investment income. Hospitals have learned that is no longer a good strategy."

Historically, Connecticut hospitals have barely broken even financially, Frayne said, and even with the improved operating performance their margins continue to be thin.

In fact, the average statewide total margin, which includes non-operating revenue and expenses, fell dramatically in 2011, as meager investment returns or even losses put some hospitals in the red.

Eight Connecticut medical centers lost money overall in 2011, compared to four a year earlier. The money losers included Griffin, Milford, New Milford, St. Francis, Windham, Rockville, Johnson Memorial, and John Dempsey hospitals.

During normal times, Connecticut hospitals will collectively see about a $130 million to $140 million return on their investments. But in 2008, as the markets began to swoon, the state's hospitals actually saw a negative return, which wiped out the ability to supplement operating income for the year.

The stock market rebound in 2010 reversed the trend as non-operating income for Connecticut hospitals shot up to about $171 million. But those gains were short-lived, and investment returns nosedived again in 2011 to only $48 million.

Frayne said it is that uncertainty that has led hospitals to move away from relying on investment income to cover day-to-day operating costs.

One of the best performing hospitals in 2011, for example, was Bridgeport Hospital, a 397-bed facility that posted an 8.15 percent total margin, despite losing $38,000 from investments.

With $34 million in excess revenue last year, only two Connecticut hospitals had plusher bottom lines.

Bridgeport Hospital CEO William M. Jennings said several factors helped drive the strong performance, including the affiliation with the Yale-New Haven Health System, which has saved the hospital tens of millions of dollars over the years.

That affiliation, which started about a decade ago, allows Bridgeport Hospital to share a back office with Yale-New Haven Hospital. Bridgeport Hospital also has leveraged Yale-New Haven's size and scope to significantly decrease purchasing costs of medical equipment and supplies, all factors driving a stronger operating performance, Jennings said.

Bridgeport Hospital saw more patients in the emergency and operating room last year and has been working "relentlessly" to reduce patient falls, catheter and central line infections, and other preventable errors that drive-up costs and potentially decrease reimbursements from private and government payers, he said.

"Those things are costly," Jennings said. "If you find best practices and implement them across the health care system you save time and money."

Affiliating or merging with a larger entity has become a common trend for Connecticut hospitals looking to sure up their bottom line.

In some cases, deals are being fueled by the needs of cash-strapped, independent hospitals to find larger, more stable partners. In other cases, independent hospitals that have remained financially stable are forming partnerships to gain greater access to capital markets.

Norwalk Hospital officials, for example, recently announced they are exploring an affiliation with the Western Connecticut Health Network despite posting a 6.57 percent total margin in 2011, which made the 328-bed medical center one of the top performing hospitals in the state.

Johnson Memorial Medical Center, which recently emerged from bankruptcy and lost money in 2011, agreed earlier this year to affiliate with St. Francis Hospital.

Helayne Lightstone, a spokeswoman for the Hospital of Central Connecticut, said the hospital's recent affiliation with Hartford Healthcare has led to outright savings as a result of joint purchasing of supplies, blood and medical equipment.

The 356-bed facility posted a 6.12 percent operating margin in 2011, its first full year as a member of Hartford Healthcare, compared to a 0.45 percent operating loss in 2010. The hospital also saw greater patient volumes, reduced malpractice insurance costs by improving quality outcomes, and moved IT services in-house, which helped reduce expenses, Lightstone said.

Besides controlling costs and improving efficiency, hospitals also have been aggressive trying to negotiate better reimbursement rates from insurance companies, said Frayne of the hospital association. That is what has led to some public contract negotiation disputes in recent years because as hospitals seek higher reimbursements, insurance companies are facing intense pressure to control rate increases.

Middlesex Hospital, Eastern Connecticut Healthcare Network, Hartford Healthcare and The Hospital of Central Connecticut have all experienced drawn out negotiations in recent years.

Frayne said the goal for hospitals is not only to ensure reimbursement rates cover normal operating costs, but also to provide a cushion so they can invest in the organization.

A healthy operating margin for a hospital is about 4 percent, Frayne said, which is enough to allow capital investments in infrastructure, technology and staff.

Only six Connecticut Hospitals — Backus, Bridgeport, Hospital of Central Connecticut, Manchester, Middlesex, and Norwalk — had operating margins at or above 4 percent in 2011.

And while financial performance for many hospitals is improving, the future remains cloudy. Jennings, of Bridgeport Hospital, said he expects Medicare and Medicaid reimbursements to continue to decline in the coming years, which is going to put more downward pressure on hospital margins. "In any scenario, we are going to be paid less for the same amount of work, or more work," he said.

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