Where do hospital profits go?

When patients at Indianapolis-area hospitals pay their bills, they're not just funding their own health care.

They're contributing to the care of Hoosiers in the rest of the state, too.

And, in some cases, they're contributing to the care of people all over the country.

That’s because many of the Indianapolis-area hospitals are using the profits they make in the metro area to help support other hospitals they operate around the state. Many of those outlying hospitals are in areas with less wealth, which means fewer patients paying with lucrative employer-sponsored insurance and more paying with Medicare, Medicaid or not paying at all.

To get a sense of this, I looked at the most recent financial results for the state's three-largest hospital systems: St. Vincent Health, Franciscan Alliance and Indiana University Health. Each system has multiple hosptials in the Indianapolis area, and many others spread around the state.

Five out of eight of St. Vincent's Indianapolis-area hospitals have operating margins in double-digits. But among eight hospitals it operates outside of central Indiana, only one has an operating margin in double digits.

At Franciscan, its Indianapolis-area hospitals are right at 10 percent in their operating margin, while none of its hospitals outside central Indiana are in that range.

At IU Health, the story is a bit more mixed, which I'll explain below.

While nearly all these hospitals are profitable, they may not be profitable enough to cover the costs of implementing new electronic medical record systems, or converting their billing systems to the new ICD-10 coding system. And almost all hospitals are losing money on their employed physicians–and in many cases those losses are accounted for separately from an individual hospital's profits.

That's where the outsized profits from the Indianapolis-area hopsitals can really help the outliers.

I have looked at hospital profits two ways. First, as their accountants look at profitability, by gains from operations (which excludes the impact of investment results and any extraordinary accounting charges). Second, as an investor would look at profitability, by EBITDA (earnings before interest, depreciation and amortization). Of course, as not-for-profit hospitals, neither St. Vincent nor Franciscan pays incomes taxes.

(As my most alert readers will note, this is different than how I analyzed hospital profits last week in my post, "Top 10 most profitable hospitals around Indianapolis." In that post, I tried to split the difference between operating margin and EBITDA, and got hammered from all sides for it. So this time, I'm just reporting both measures.)
 
Below are St. Vincent’s central Indiana hospitals, with operating margin in the left column and EBITDA margin in the right column:  

 As you can see, only the hospital in Anderson and the newly-opened hospital in Fishers do not have EBITDA in the double-digit territory.
 
When we look at St. Vincent’s other hospitals, they are still doing fairly well, but none of them have the stellar profits that St. Vincent’s Carmel hospitals do. (Again, the left column is operating margin and the right column is EBITDA.)

While none of the St. Vincent hospitals is losing money, keep in mind two things:

First, most of the St. Vincent hospitals are also sending money to their parent organization, St. Louis-based Ascension Health, which operates Catholic hospitals around the country. As I wrote in January, those payments have totaled roughly $50 million to $70 million each year. (To see the impact of those payments by hospital, see this St. Vincent spreadsheet.)

Also, one of the biggest expenses the Indianapolis-based health systems take on for their outlying hospitals is the cost of employing physicians. At St. Vicnent, its employed physicians lost $115 million in the most recent fiscal year. But we don't know how those loses break out per hospital.

The difference between Indianapolis and the outlying areas is even more stark when we look at Franciscan’s hospitals.

Here are the combined profits of Franciscan's Indianapolis-area hospitals, which are located in Carmel, Indianapolis and Mooresville.

And here are the profits of Franciscan's other Indiana hospitals:
 

To see more detail on the finances of Franciscan's hospitals, look at this Franciscan spreadsheet.

Neither IU Health nor Community Health Network break out the financial performance of their individual hospitals in their audited financial reports. But we can see the same basic thing happening among IU Health’s hospitals by using the same data I did last week, the cost reports each hospital system files with the Indiana State Department of Health.

I use this IU health example with some hesitation. After my post last week on the most profitable hospitals around Indianapolis, I was told by some hospital officials that the data I used–which hospitals report to the Indiana State Department of Health–not always consistent with hospitals' audited financial statements. So keep that in mind. (If you want more detail, see this IU Health spreadsheet.)

It’s also worth noting that 2012 was probably the best year hospitals will see for a while. Not only were their financial results boosted by extra income from the state Hospital Assessment Fee program, but also hospitals had started to cut expenses ahead of the changes they knew were coming from Obamacare, which didn’t start affecting their revenues until 2013.

For a vivid example of this, see my post earlier this week on how Franciscan Alliance's 2013 profits swooned by 72 percent from their 2012 levels.
 
But these 2012 numbers still give us an idea of one of the key features of American healthc are–that money spent for one thing often goes to shore up something else. It's true among the various services hospitals offer. And it's true in the different geographies in which they operate.