News & Events

Big hospitals flush with cash despite industry’s dire warnings

Critics say large hospital operators that are amassing cash are doing so at the expense of patients

By Bruce Japsen
Tribune reporter
December 22, 2009

If you listen to hospital lobbyists in Washington, the industry teeters on the brink of financial ruin, depending on how health care reform plays out.

But the rhetoric does not match the balance sheets of some of Chicago’s largest hospital operators. Many are spending unprecedented amounts on new buildings and seeing some of their best improvements in cash since the dot-com boom of a decade ago.

Critics say large hospital operators that are amassing cash are doing so at the expense of patients, charging higher prices when that money could be used to lower costs or subsidize hospitals in a hole.

The hospitals maintain they need to have ample cash to invest in the latest medical technology, attract top medical care providers and maintain a reserve to cushion themselves from rocky economic conditions.

In a U.S. News and World Report opinion piece written this summer as the reform debate reached a fever pitch, Richard Umbdenstock, president and chief executive of the American Hospital Association, said the nation’s hospitals cannot afford health care cuts.

"Make no mistake, many of America’s hospitals will not be able to withstand the cuts that the administration and the Congress are considering," Umbdenstock said. "They already are experiencing increases in charity care and nonpayment for services as the economic downturn affects more and more Americans and their employer-provided insurance coverage."

Indeed, more Americans are going without health insurance, and unpaid bills continue to pile up at the nation’s hospitals. The association, which represents more than 4,000 U.S. hospitals, said last month in a report titled "The Economic Crisis: Ongoing Monitoring of Impact on Hospitals" that one in five hospitals has reduced services.

These economic realities are hurting smaller community hospitals, which don’t have the deep pockets or big pool of insured patients that bigger facilities do. Some are being forced to look into joining larger systems.

The industry begrudgingly has endorsed reductions in federal spending to hospitals by more than $150 billion over 10 years in exchange for more Americans being covered. And hospitals fought hard and helped defeat a proposal to allow those age 55 to 64 to buy into Medicare; hospitals worried their reimbursements would suffer from a program they claim already does not cover their costs.

But the actions of Chicago’s largest hospital operators, all nonprofit organizations, tell a different story. Many have rebounded since last year’s collapse of the financial markets and are spending unprecedented dollars on new facilities:

— Rush University Medical Center is in the midst of a $1 billion renovation of its West Side campus.

–Advocate Health Care is acquiring hospitals across the state and spending tens of millions of dollars on new facilities.

–Northwestern Memorial Hospital, which has built two new teaching facilities downtown at a combined cost of more than $1 billion, last month disclosed plans to acquire Lake Forest Hospital in the affluent northern suburb and replace the 215-bed facility in 10 years under a proposed deal.

"These wealthy hospitals like to march hand and hand with cash-strapped hospitals under the umbrella of ‘all of us walking together,’ but all hospitals are not created equal," said William McNary, co-director of Citizen Action Illinois, a longtime advocate for safety-net hospitals, which provide care for the poor in communities that are considered medically underserved. "A lot of these wealthy hospitals are using their money to gobble up more hospitals."

Take Advocate Health Care, the Chicago area’s largest provider of medical care, which has watched its unrestricted cash soar by more than 30 percent, to $2 billion from $1.5 billion at the start of this year, according to a report last month from Moody’s Investors Service, which rates the debt of hospitals.

The Oak Brook-based operator of nine Chicago-area hospitals is using its strong balance sheet to embark on a major expansion. Advocate is set to close by next month on a deal to add BroMenn Healthcare System, parent of 224-bed BroMenn Regional Medical Center, which serves the Bloomington-Normal area, and 25-bed Eureka Community Hospital, the only hospital in Woodford County.

In addition, Advocate says its financial position allows it to maintain quality medical care services in markets where it buys hospitals, shoring up money-losing facilities such as Condell Medical Center in north suburban Libertyville. Condell had been mired in financial problems and accounting woes before joining the Advocate system in December 2008, the hospital’s financial reports at that time showed.

"What is attractive to a Condell or a BroMenn is we bring Advocate’s operating systems, scale, supply-chain management … and access to 3,000 doctors to Lake County (in Condell’s case) or to central Illinois (in BroMenn’s case)," said Bill Santulli, Advocate’s executive vice president and chief operating officer.

In Condell’s case, the hospital was "distressed" by blunders of a previous management team that had lost a contract with the state’s largest commercial insurance company, Blue Cross and Blue Shield of Illinois. Once under Advocate ownership, Condell again could be paid by Blue Cross, which has a contract with Advocate facilities and is Condell’s largest commercial payer, Advocate executives say.

What’s more, Advocate was able to commit to building a new 72-patient bed tower at Condell for more than $90 million.

At Lake Forest Hospital, management has said it can more easily finance a replacement hospital once under the umbrella of Northwestern Memorial Health Care, parent of Northwestern Memorial Hospital in Chicago. Northwestern Memorial has more than $1 billion in cash, several times the amount of money Lake Forest Hospital has for a replacement facility, which likely will cost several hundred million dollars, analysts say.

"Our solid financial performance from operations during the recent economic downturn is largely due to our management discipline of planning and execution," said Peter McCanna, Northwestern Memorial’s chief financial officer. "Our long-range financial plan is based upon specific goals, adjusted as necessary to accommodate significant changes in the market, such as those we experienced this past year."

But critics say the biggest hospital operators have advantages.

"The large hospitals in Chicago are not-for-profit and don’t pay property taxes," Citizen Action’s McNary said. "If hospitals are getting tax breaks, we need to know if taxpayers are getting their fair value for their tax dollar."

One issue before the Illinois Supreme Court may decide whether not-for-profit hospitals in the state should provide a certain level of charity care to justify a tax exemption. The court could rule soon on the long-running case involving a Catholic nonprofit hospital in Urbana that is owned by Chicago-area nonprofit Provena Health.

But Advocate’s Santulli says nonprofit hospitals need to have a lot of cash when they go to the debt market to finance capital expenditures. "Bondholders require us to have cash piled up on our balance sheet," he said. "They want to see that cash as collateral if something were to head south."

University of Chicago Medical Center, which is spending $700 million on a new hospital pavilion, said its new facility is "central to the medical center’s mission, to its leadership positions in patient care and clinical research, and its long-term financial strength."

Nonprofit hospitals, unlike for-profit companies, invest "any revenue that remains after paying expenses back into the programs, people and facilities of the medical center," said Rush University Medical Center’s chief financial officer, Catherine Jacobson.

Rush issues debt through a so-called obligated group that includes Rush-Copley Medical Center in Aurora. The obligated group had $538 million in unrestricted cash and investments as of Sept. 30, a 21 percent increase from the same date last year.

Jacobson said most of the money for the campus redevelopment, which is needed to replace six buildings, including some that are more than a century old, comes from operating income, "but even this is not sufficient given the scope and size of the project."
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