How vulnerable are Rochester’s hospitals?

Are Rochester’s health systems better positioned financially than their counterparts nationwide to ride out the coronavirus pandemic?

To answer that question definitively requires certain financial information that neither the University of Rochester Medical Center nor Rochester Regional Health are willing to disclose. But using data the systems report to the federal government, it is possible to perform calculations that allow comparisons with hospital systems nationally. Likewise, it is possible to understand how the pandemic poses a severe threat to hospitals’ financial health.

The occupancy factor

A key piece of the systems’ current financing puzzle is hospital occupancy rates. Due in no small part to extremely high occupancy rates, Rochester region’s largest hospitals have generated bottom-line surpluses for two decades. 

As a health care beat reporter for the Rochester Business Journal during those years, I scrutinized local hospitals’ operating results annually. And each year, I heard variations of the same story from a succession of CEOs and chief financial officers of Rochester Regional Health and UR Medicine: The city’s hospitals were perennially crammed to the gills with patients. Occupancy rates at Strong Memorial, Rochester General and Unity hospitals routinely surpassed 100 percent. Highland Hospital, meanwhile, saw occupancy hover in the 85 to 90 percent range. 

While such overcrowding posed logistical problems, it was a financial boon, officials told me. High occupancy rates kept Rochester hospitals’ revenue flowing and put bottom lines in the black. Across much of the state, that was not the case. 

Seeing the state dangerously overstocked with hospital beds, New York formed the Commission on Health Care Facilities to study the problem. In 2006, that body—known as the Berger Commission—issued its final report, a more than 200-page document spelling out region-by-region recommendations for shutting down and consolidating hospitals. 

Low occupancy put hospitals’ operating margins in negative territory, the commission found.

“Negative or inadequate fiscal margins limit the ability of providers to reinvest in their systems, obtain the latest technologies, access capital, and upgrade their physical plants. Many of our hospitals and nursing homes are outdated and in need of capital improvements,” the report stated. 

The proposed solution to the problem was laid out in explicit detail in the commission’s report, which targeted specific institutions to be culled. Its recommendations were largely carried out by state mandate in subsequent years.

Only one region—Monroe County and eight adjacent and nearby counties—largely escaped the Berger Commission’s scythe. They were spared due to an event that at the time was seen as an unhappy blow to the area’s health care system: the precipitous 2001 shutdown of Genesee Hospital. 

The sudden removal of Genesee’s 385 beds came on top of the earlier planned elimination of St. Mary’s Hospital’s approximately 85 medical/surgical beds in the 1997 merger of St. Mary’s and Park Ridge Hospital in Greece. It left the city’s remaining hospitals scrambling to accommodate a sudden influx of patients. While the rest of the state’s hospitals were overstocked with beds, Rochester’s were perilously short of beds, a situation that persisted until this April, when the city’s hospitals had to clear space virtually overnight to make room for a possible surge of COVID-19 patients.

Through the early and mid-2000s, the University of Rochester Medical Center’s Strong Memorial and Rochester General—which had merged with Genesee to form ViaHealth, a predecessor health system to RRH—steadily brought other city hospitals and outlying hospitals into their orbits to form the two systems that today control nearly 100 percent of a region covering seven counties. 

Now, known as Unity Hospital, Park Ridge ultimately merged with Rochester General, which had already acquired two small Wayne County hospitals to form Newark-Wayne Community Hospital. In subsequent years, RRH brought Ontario County’s Clifton Springs Hospital and Clinic and Genesee County’s United Memorial Health Center into its system. 

URMC, meanwhile, was busy forming the UR Medicine network. First, it added Highland Hospital. F.F. Thompson Memorial Hospital in Ontario County followed. When Lakeside Hospital in Brockport faltered, URMC bought its building and won approval from the state to turn the Brockport hospital into a remote emergency department under Strong’s license. Later additions were Nicholas H. Noyes Hospital in Dansville, Livingston County, Jones Memorial Hospital in Wellsville, Allegany County, and St. James Mersey Hospital in Hornell, Steuben County. 

The regional hospital consolidations had advantages for the overcrowded city hospitals and their smaller, underutilized outlying counterparts.

Because they chronically had too many unoccupied beds, the outlying hospitals were struggling financially and thus had trouble attracting qualified staff and maintaining their facilities. URMC and RRH could offer clinical support in the form of staff and equipment to help the outlying hospitals treat patients in their own communities.

In the early 2000s, Common Ground Health chief medical officer Thomas Mahoney M.D. facilitated talks among the area’s financially challenged rural health systems. Mahoney worked as part of the 2020 Commission, a locally organized group formed to seek solutions to the problems the Berger Commission highlighted.

Formed under the aegis of Common Ground’s predecessor, the Finger Lakes Health Systems Agency, the 2020 Commission worked closely with the state Department of Health. Commission members included representatives of area hospitals and health systems, civic leaders and provider groups like the Monroe County Medical Society. Among its signal achievements were agreements by the Rochester health systems to significantly pare plans to add hundreds of millions of dollars of new beds to the city’s hospitals and agreements to bring struggling rural hospitals under the wings of RRH and the URMC system.

The commission found that a significant contributor to rural institutions’ under-occupancy was the fact that a more mobile rural population often chose to seek care at the region’s better-equipped and better-staffed city hospitals, adding to the urban systems’ overcrowding.

The city hospitals like Strong and Rochester General could handle more complex cases that remained beyond the outlying hospitals’ capabilities, Mahoney says. Strong, for example, can do organ transplants. By extending clinical support to rural partners, the city hospitals could increase the rural hospitals’ occupancy and relieve some of their own overcrowding.

Meanwhile, complex cases like transplants, heart surgeries and joint replacements are also among the most profitable procedures. As feeders of such cases to their parent systems, outlying hospitals helped shore up the city hospitals’ bottom lines. 

Operating margins

While the mergers and consolidations that created the sprawling RRH and UR Medicine systems went a long way toward stabilizing the region’s hospital and health system finances, they were not completely successful. 

By 2017, the most recent year for which the local systems have publicly stated their hospitals’ financials, RRH’s and URMC’s hospitals’ results were uneven. 

The measure that the hospital industry uses to take its own financial temperature is operating margins, a metric arrived at by subtracting an institution’s expenses from its revenues derived from patient care and dividing the product by patient revenues. 

According to a 2019 Healthcare Association of New York State report, excluding the very small number of relatively profitable hospitals in New York, roughly half of the state’s hospitals have razor-thin positive operating margins, while the other half has negative operating margins.

The pre-COVID finances of URMC hospitals mirrored the statewide results, with roughly half showing positive but very thin operating margins and the other half reporting negative operating margins, URMC spokesman Chip Partner wrote in an email. More specific numbers for URMC and RRH hospitals are not disclosed publicly. 

URMC chief financial officer Adam Anolik declined to share patient revenue and expense figures from URMC hospitals’ audited financial statements, while RRH CFO Thomas Crilly, citing the many current uncertainties of hospital financing, declined multiple requests to be interviewed and did not respond to questions submitted to an RRH spokeswoman.

To fill the gap, I calculated the health systems’ hospitals operating margins using program service revenue and total expense figures (minus interest expense) available from a publicly available source: annual reports submitted by the hospitals to the Internal Revenue Service on forms known as 990s. Numbers for Strong Memorial, whose financial results are folded into UR’s 990, were not available.

URMC’s Partner in an email cautioned against “leaning too heavily” on 990-derived calculations. Numbers taken from audited financial statements—which URMC declined to provide—would be more reliable, he suggested.

Even so, financial data reported to the IRS should give a reasonably accurate picture—and in many cases could be identical to audited results. 

The single example Partner cited of a possible discrepancy—that URMC hospitals’ expenses would include costs for researchers and medical school faculty and staff covered in large part by grants, tuition, and other income that does not show up in clinical revenue on the 990—would apply only to Strong Memorial, whose operating margins were not included in my calculations.

Those calculations show some area hospitals with healthy surpluses, but others with break-even results or red ink. Significantly, a majority—including some of the systems’ most heavily used and highly occupied flagship institutions—were losing money on operations.

URMC’s Highland Hospital, for example, in 2017 reported a seemingly healthy 4.7 percent profit margin, up a tenth of a point from the previous year. In each of those same two years, however, Highland lost money on operations, with an approximately $1 million in operating loss in 2016 and a $2.8 million operating loss in 2017, which respectively yielded negative operating margins of 0.3 percent and 0.8 percent.

Similarly, Rochester General reported a 3.8 percent profit margin in 2016 and an even healthier 4.9 percent profit margin in 2017. Yet in 2016 it made $2.4 million on operations, producing a 0.3 percent operating margin. In 2017, Rochester General’s profit on operations was slightly more than $500,000 for an operating margin that barely broke even, 0.1 percent.

U.S. nonprofit and public hospitals nationwide have been pressured by rising expenses and flat revenues, Modern Healthcare reported in an April 2019 article that examined the hospitals’ financial vulnerability. 

Non-profit hospitals saw their 2018 operating margins dip to a troublingly low 1.7 percent median, down a tenth of a point from a year earlier, Modern Healthcare found. The nonprofit hospitals’ operating results, with margins falling almost a full point below the 2.5 percent considered safe to adequately maintain facilities, were “anemic,” Christopher Kearns, executive director of the Advisory Board, told the magazine.

As a group, New York hospitals’ operating margins before the pandemic struck averaged 1.7 percent, making for “the narrowest average hospital operating margin in the nation” and falling substantially under the national average operating margin of for-profit and nonprofit hospitals of 6.7 percent, HANYS director of public affairs Janae Quackenbush wrote in in an email. 

A composite 2017 operating margin for RRH and URMC hospitals (excluding Strong Memorial) of negative 0.4 percent, calculated using 990 numbers, would seem to indicate that this area’s hospitals substantially underperformed their peers nationally and did not outperform their New York peers. 

The need for federal aid

Even though a state-imposed cap on hospital occupancies to 70 percent of surge capacity has now been lifted, hospitals, ambulatory centers and medical practices will continue to keep social-distancing measures in place. As a result, for the foreseeable future the region’s overall clinical care volumes will remain below pre-COVID levels and hospital occupancy rates will stay below the greater than 100 percent levels that previously helped buoy area health systems’ bottom lines, URMC’s Partner concedes.   

To make up for operating income shortfalls, area hospitals have turned to a variety of sources including charitable donations, government grants, profits on investments and parking-garage fees. How much such sources will continue to boost their bottom lines in a pandemic-buffeted economy remains to be seen.

Rep. Joe Morelle has been in close touch with representatives of URMC and RRH throughout the pandemic and is well aware of the systems’ financial challenges.

Under current conditions, the Monroe County Democrat says, it will be difficult if not impossible for area health care providers to generate sufficient volume to make up for the stunning losses suffered at the pandemic’s height. Based on what he is hearing from the health systems, both are continuing to bleed millions of dollars of red ink, Morelle believes. They will continue to do so for months to come, he predicts. 

New infusions of federal aid will be needed to keep the systems afloat, Morelle says. His “back of the envelope” calculation puts the combined amount needed for both at $1 billion over the next year. 

In addition to direct aid to providers, a boost in the federal contribution to Medicaid is also needed, Morelle says. Medicaid funding is split approximately 50/50 between the federal government and states. Each state follows federal guidelines but designs and administers its own Medicaid program. Without an increase in the federal contribution, states including New York would have to cut back their Medicaid programs, with reductions falling on already strapped doctors and hospitals.

Whether federal aid will be forthcoming is far from clear as a divided Congress jousts over future aid.

The Democratic-controlled House of Representatives has passed the Heroes Act, a $3 trillion aid package whose provisions include a 14 percent bump up in federal Medicaid contributions to states, $100 billion in hospital aid and additional assistance for essential workers, a group that includes nurses, emergency medical technicians, and nursing home and home health care aides.

The Senate and the Trump administration have given the Heroes Act a cool reception, however. 

A new aid package “will not be the $3 trillion bill the House passed the other day,” Senate Majority Leader Mitch McConnell, R-Ky. declared shortly after the Heroes Act’s passage in May.

Other than liability protections against COVID-19 lawsuits for businesses agencies, McConnell, who earlier said he would prefer to see states declare bankruptcy than proffer more federal aid, has not said what aid he would agree to provide. House Speaker Nancy Pelosi, D-Calif., and Senate Minority Leader Chuck Schumer, D-N.Y., meanwhile, say they will balk at allowing such liability protections on grounds that they would endanger worker safety.

When Congress will begin to hammer out the shape and extent of further federal aid also is uncertain. 

Citing better-than-anticipated May unemployment numbers as proof that the economy is recovering on its own, McConnell and the GOP Senate majority he leads have made clear they are in no hurry to start talks.

To date, no Senate talks on further coronavirus aid have begun.

Notwithstanding any qualms over my use of 990 numbers to calculate operating margins, Partner told me that URMC CFO Anolik “strongly agrees” with this article’s premise: that without federal aid area, hospitals will have a rough time recovering from the pandemic’s financial hits and restoring financial stability.

This is the second of two articles. The first article, “Another COVID crisis,” was posted June 25, 2020.

Will Astor is Rochester Beacon senior writer. All Rochester Beacon coronavirus articles are collected here.