Sequester won’t batter Indianapolis hospitals

As President Obama said, the pain of the federal sequester will be real. But when it comes to hospitals, how real and how painful depends on where they are and how big they are.

While rural hospitals face sharp reductions in their operating margins, most of the four major hospital systems that operate in Indianapolis will see only a marginal impact on their profits.

The 35 critical-access hospitals in Indiana—which have just 25 beds each and tend to be in rural areas—will see their operating margins chopped 31 percent, according to data provided by the Indiana Rural Health Association.

Such hospitals now generate operating margins of just 1.58 percent, and a 12-month sequester would drop those margins to 1.09 percent. Operating margins reflect the profitability of a hospital’s health care services, and exclude any gains or losses on investments.

“It’s a perfect storm, in my opinion,” said Don Kelso, executive director of the Indiana Rural Health Association. “Rising costs to provide care to the people that need the care at the same time your reimbursements are being cut.”

Franciscan Alliance, which operates St. Francis Hospital in Indianapolis, faces a 16-percent cut in its operating margin from the federal budget sequester. (IBJ file photo)

But the story will be far different for the four large hospital systems that operate in Indianapolis.

If the 2-percent Medicare reimbursement cuts from the sequester had been effective in 2011—the most recent year for which local hospitals have reported financial results—their operating margins would have been reduced 8 percent to 16 percent. Even those cuts would have left each hospital system with healthy margins of no less than 3.8 percent.

Indiana University Health would have seen its operating income of $186 million fall nearly $21 million, or about 11 percent. IU Health’s operating margin would have declined from 4.3 percent to 3.8 percent.

St. Vincent Health would have seen its operating income of $157.7 million fall about $12 million, or 7.6 percent. That cut would have reduced its margin from 7.2 percent to 6.7 percent.

Community Health Network would have seen its operating income of $75.7 million reduced about $7 million, or about 9 percent. That would have meant its operating margin would have been reduced from 5.6 percent to 5 percent.

Franciscan Alliance would have seen its operating income of $114.8 million fall $18.5 million, or about 16 percent. Its operating margin would have fallen from 5.2 percent to 4.4 percent.

According to a large physician practice based in Indianapolis, American Health Network, the impact of the cuts will be minimal in the short term for large health care providers. But the pain will be felt long term.

“We are always concerned about reductions in physician payments,” Don Stumpp, past president of the Indiana Medical Group Management Association, wrote in an e-mail.

“While a 2-percent cut will not be devastating, physician practice costs continue to increase like any business. There won’t be any immediate impact, but if the cut isn’t reversed, doctors will need to make some budgetary adjustments.”•