A guiding principle from the real estate sector is playing an increasingly important role in hospital profitability: location, location, location.

Urban center hospitals, such as Jewish Hospital — which is losing money and was just put up for sale — generally handle a greater variety of cases than their suburban rivals: Jewish takes takes care of elective procedures, but also has to be equipped and staffed to take care of victims of car crashes, industrial accidents and gunshot wounds.

Jewish Hospital and other facilities across the nation are struggling financially in part because of the complexity and variety of cases they handle.

The demands that greater complexity of care places on urban hospitals requires greater investments in equipment and staff. And patients with traumatic injuries, such as a skull fracture from a car crash, are less likely to have any insurance and, if they do, are more likely to be on government insurance, which pays hospitals less for procedures than private insurers.

So urban hospitals incur greater costs to prepare for all kinds of care — and get fewer dollars for the care they provide — if they get any money at all. If a gunshot wound victim carries no insurance, he still gets care. And while he will receive a bill, he may not be able to pay, in which case the care goes uncompensated.

Nationally, some hospitals have moved out of urban areas to locations that have a “better paying patient mix,” said Beth Munnich, assistant professor of economics at the University of Louisville.

Losing money

Jewish Hospital and other Louisville facilities KentuckyOne Health plans to sell continue to lose tens of millions of dollars annually — while University Hospital is generating a profit.

KentuckyOne’s parent, Denver-based Catholic Health Initiatives, released a financial report last week that helps explain why the Louisville-based health system wants to get rid of Jewish Hospital and other local medical facilities: They are losing more money — and they soon will have to do without the support of the profitable University Hospital, which has propped up the system’s Kentucky operations.

KentuckyOne on May 12 cited “significant challenges” in the health care industry when it announced that it would sell Jewish Hospital, Frazier Rehab Institute, Sts. Mary & Elizabeth Hospital and other facilities. On Friday, the system said its CEO will leave July 14.

In the quarter ended March 31, Jewish Hospital and the other assets KentuckyOne wants to sell incurred an operating loss of $12.7 million. Through the first nine months of the fiscal year, those assets lost $61 million, only slightly better than a year earlier, when the loss was $72 million.

Meanwhile, University Medical Center, which includes University Hospital, in the same quarter generated a profit of $13.1 million. KentuckyOne controls 90 percent of income and loss for UMC, thanks to a joint operating agreement the health system signed in 2012 with the University of Louisville.

However, late last year, KentuckyOne and the university said they were ending that troubled JOA. That means that as of July 1, KentuckyOne will lose the one profit-generating local asset that has helped defray the losses produced by the other local assets — which it is now trying to sell.

CHI also said that the Kentucky operations have been hampered by staffing shortages, which has required more overtime pay, and a shift toward more patients whose insurers are not paying enough to cover the cost of care that is being provided.

CHI as a whole incurred a loss from its operations of $40 million in the quarter ended March 31. That was down from a loss of $82 million a year earlier. Seven of the system’s 12 regions showed financial improvements compared to a year earlier, but five, including Kentucky, did not.

KentuckyOne Health was created by the merger of the former Jewish Hospital & St. Mary’s HealthCare and Saint Joseph Health System. Almost since its inception, the nonprofit health system struggled financially, racking up losses of about $300 million in fiscal years 2010 to 2014, according to IRS records.

CHI said it expects to finalize the sale of Jewish and the other assets by the end of this year.

Demographics, reimbursement rates

Elizabeth Munnich

The struggles of KentuckyOne and CHI mirror national trends: Nearly 160 hospitals closed from 2013 to 2015, eliminating nearly 23,000 hospital beds, according to the American Hospital Association’s most recent data. In Kentucky, five hospitals have closed in the last two years or ceased providing inpatient care, according to the Kentucky Hospital Association.

Munnich, the UofL professor, said that hospitals have seen fewer patients in part because they are undergoing some medical procedures in small, specialized clinics rather than large, all-encompassing hospitals. Those procedures include partial knee replacements, cataract surgeries and diagnostic services that typically are covered by private insurance companies, which pay the hospitals more than Medicare, the government insurance program for the elderly, and Medicaid, the program for the poor.

That revenue stream from elective procedures played an important role for hospitals, but it has increasingly moved to clinics, Munnich said.

Some technological and medical advances also have helped patients recover more quickly, which means they spend less time in hospital, which means less money for hospitals.

And, Munnich said, on average, people are getting older and less healthy, which means hospitals are seeing more of the sickest, highest-cost patients.

Nancy Galvagni, a spokeswoman for the KHA, told Insider that while hospital utilization had dropped, the real challenge for many hospitals was that Medicare and Medicaid did not pay hospitals enough to cover the cost of the services they provided.

She said Medicare payments were cut under the Affordable Care Act to help pay for the expansion of coverage under Medicaid and the health exchanges. On average, the federal government pays hospitals 8 percent less than it costs the hospitals to provide service for a Medicare patient.

“The Medicare cuts to Kentucky hospitals under the ACA are estimated to total $7 billion through 2026,” Galvagni said.

And while the Medicaid expansion has provided insurance coverage to about 400,000 additional Kentuckians, hospitals lose money on Medicaid patients, too, she said.

Galvagni said, “While it is difficult to generalize, hospitals with a higher patient population comprised of Medicare and Medicaid patients are having a more difficult time surviving, despite aggressive cost cutting which involves reducing services and, unfortunately, staff.”

More bad debts

Even people who obtain insurance through their employers are increasingly unable to pay their bills because of higher deductibles, she said. People with high-deductible plans often put off medical procedures until they meet their deductible, which may mean more serious health problems and a higher risk for complications.

And, she said, higher deductibles mean higher out-of-pocket costs, which increases the likelihood that people cannot pay their bills.

David McArthur, senior manager of media relations for KentuckyOne Health, said, “Locally and nationally, health systems are experiencing dramatic changes created by the ongoing evolution of health care reform and reimbursement structures.

Jewish Hospital handles “a range of highly specialized cases and very ill patients, but the reimbursement rates do not always cover the cost of this complex care,” McArthur told Insider via email. “The ongoing challenge of operating a … highly complex hospital with leading services has placed a great strain on our finances.”

Those and other factors, he said, “have slowed the ability to close the financial gap, despite increasing patient volumes at some facilities.”

To be sure, many urban hospitals, including University Hospital, are doing fine, despite facing similar challenges as Jewish.

Dr. Peter Hasselbacher

Dr. Peter Hasselbacher, emeritus professor of medicine at UofL and president of the Kentucky Health Policy Institute, said that KentuckyOne’s struggles also can be attributed to poor management and its failed JOA with the University of Louisville.

“It was a partnership that just didn’t work,” he said.

And, he said, those factors can’t be blamed on national trends.

However, Hasselbacher said that hospitals such as Jewish are struggling also because their traditions have dictated that they take care of a larger-than-average share of people on Medicaid and others who cannot pay for the care they are receiving.

Some nonprofit hospitals in Louisville take almost no Medicaid patients, he said. A lesson one may draw, he said, is that health care providers can do well if they don’t help taking care of the disadvantaged.

Those people will still need help after Jewish changes hands or folds, Hasselbacher said.

“What’s going to happen to those folks?” he asked.

 

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Boris Ladwig
Boris Ladwig is a reporter with more than 20 years of experience and has won awards from multiple journalism organizations in Indiana and Kentucky for feature series, news, First Amendment/community affairs, nondeadline news, criminal justice, business and investigative reporting. As part of The (Columbus, Indiana) Republic’s staff, he also won the Kent Cooper award, the top honor given by the Associated Press Managing Editors for the best overall news writing in the state. A graduate of Indiana State University, he is a soccer aficionado (Borussia Dortmund and 1. FC Köln), singer and travel enthusiast who has visited countries on five continents. He speaks fluent German, rudimentary French and bits of Spanish, Italian, Khmer and Mandarin.