By Emily J. Tipping.

Published July 2001

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But there are indications that physicians and hospitals in the western region of the state are also struggling to realize a viable financial balance of the reimbursement-minus-overhead equation. A radiologist shortage appears to exist in the region, as reimbursement rates may be failing to keep and attract physicians, and some hospitals are eliminating risky services such as obstetrics in order to trim expenses.

The financial picture for hospitals in the western part of the state is, in some cases, even worse than in the Philadelphia region. According to a May report from the Pennsylvania Health Care Cost Containment Council (PHC4), hospitals in a four-county region surrounding Philadelphia averaged a 2.06 percent operating margin (operating income as it relates to business volume) in the fiscal year ending in June 2000. Philadelphia hospitals operated at a 1 percent margin, on average.

By comparison, hospitals in the southwestern and northwestern regions of the state posted average operating margins of only .07 percent and .72 percent, respectively. Put into perspective, PHC4 found that Pa.’s average total hospital margin in fiscal 2000 was 37 percent lower than national averages.

Among the hospitals with negative operating margins for fiscal 2000 were Allegheny General (-1.69 percent), Forbes Regional (-11.70 percent), UPMC Shadyside (-.29 percent), UPMC Beaver Valley (-55.33 percent), St. Francis Medical Center (-13.54 percent) and Mercy/Providence (-12.96 percent).

PHC4 data showed that four of six acute care hospitals in Erie lost money in fiscal 2000, with Saint Vincent Health Center losing $12.5 million and Hamot Medical Center posting a small operating profit, but with surpluses coming from income sources other than patient care, according to the Erie Times-News.

Even in more profitable days before managed care, hospitals in western Pa. have had lower operating margins than the rest of the country because of lower reimbursements, according to Walter Wayne, senior vice president of finance and CFO of the Hospital Council of Western Pennsylvania (HCWP).

"From my travels, it seems other places have better contracts with payers. It explains why there aren’t that many for-profit hospitals in the region—because you can’t make any money," said Wayne.

Compared to fiscal 1999, however, the PHC4 report did show an increase in both profit margins and reimbursements, and that upswing may be continuing, according to incomplete data from the HCWP. According to Interstudy rankings of HMO payments to hospitals in the 25 largest metropolitan statistical areas in the country, Pittsburgh hospitals receive the highest inpatient payments, according to Dennis Olmstead, chief economist for the Pennsylvania Medical Society.

In contrast, physicians rank 17th in Interstudy’s rankings of HMO payments in the 25 largest metropolitan statistical areas in the country.

"Maybe we don’t complain enough," suggested Paul Dishart, M.D., president of the Allegheny County Medical Society and director of medical education at UPMC St. Margaret. Dishart said Pittsburgh’s relatively low cost of living probably has a good deal to do with the bargain basement reimbursements physicians have worked with over the years.

"Historically, Highmark has been dominant here, although UPMC Health Plan has become more competitive. When you have a predominant payer, there’s not as much negotiation for reimbursement," said Deborah Robinson, a health care attorney with the Pittsburgh law firm Houston Harbaugh.

Federal payers also contribute to the under-reimbursement problem. Medicare reimbursement for anesthesia in the region is such an anomaly that Medicare is considering raising its per-unit payment by $13, Robinson added.

A national lack of residency slots and low reimbursements have contributed to a local shortage of radiologists who specialize in mammography, resulting in waits up to three months to get routine diagnostic testing.

In response, Pittsburgh area radiologists have started their own talks with Highmark Blue Cross Blue Shield to boost reimbursements for mammograms, which range from $58 to $60. Ellen Mendelson, M.D., director of The Western Pennsylvania Hospital’s breast imaging center, said that initial meeting with the insurer was productive. "They understand better why things need to change. We are working on a cost analysis for them specific to this area, down to the paper clip needed to attach forms," she said. The cost to provide a mammogram here is about $70, she said.

More than 10 years ago, Mendelson said radiologists themselves pushed to perform mammograms for less money because they thought cost was keeping women away. "Mammography became a loss leader, and then Congress, through the Health Care Financing Administration, set the price and it hasn’t gone up since," she said.

Mendelson said the liability involved in reading mammograms also has kept physicians from the field. At the same time, increased awareness about mammography and its importance in early detection of breast cancer means more women make the test an annual event.

"We want to avoid a situation where losses from mammography lead to decreased radiology services in general in hospitals," she said.

Loss of market share prompted two western Pennsylvania hospitals—St. Francis Medical Center and UPMC McKeesport—to cut obstetrical services in the past year.

Richard M. Weinberg, M.D., senior vice president of medical affairs at St. Francis Health System for the past three months, said St. Francis’s Lawrenceville facility was delivering only 500 babies a year, many of them to mother’s involved with the hospital’s addictive services unit. Because of the nature of those deliveries, many other mothers required perinatal care, a costly service provided mainly at larger, teaching hospitals. A majority of the OB staff and the health system’s board agreed that relinquishing service was in the best interest of the community, said Weinberg.

The move was only one of many housecleaning efforts by the struggling health system, which posted operating margins of -13.54 percent in fiscal 2000. In April of that year, Moody’s Investors Service downgraded St. Francis to junk bond status, criticizing the hospital’s management of its $200 million investment portfolio, expressing concern that it was relying on the stock market to cover its operating expenses, and attracting attention of the Wall Street Journal.

Outside consultants were brought in last fall to help turn the health system around. "We were aggressive in the market, there’s no question," said Weinberg. "But we didn’t lose money on investments, we actually made a good deal of money. The problem was that we relied on investment earnings to subsidize unprofitable operations, and a business shouldn’t do that. We have corrected that, and have been operationally profitable the last quarter," he said.

It’s hard for hospitals in financial duress to make changes in their pay structure, but Weinberg said St. Francis will revise it’s nursing budget for the coming fiscal year, he said, to help them compete for what has become a critically limited nursing staff.

According to Robinson, problems in the western Pa. market stem from more than just contracts between payers and providers. There are financial pressures particular to individual providers, such as the bond repayment required of the newly formed West Penn Allegheny Health System, she said.

Robinson and other market watchers and physicians also point to other financial stumbling blocks for the region’s health care providers, including a large elderly population requiring expensive services, overcapacity, prohibitive malpractice insurance rates and a shortage of nurses.

Weinberg believes that it is competition in the Pittsburgh market that is driving prices down. "Yes, there is a big older population. But that means enormous revenue as well as strain. I don’t think, per se, that the high predominance of Medicare patients is a cause of problems here. They might be the best fee-for-service group of patients here right now. But here, as in other markets, there has been sluggishness in response to changes in payments from Medicare," he said.

PHC4 spokesman Joe Martin said declining reimbursements can’t be used as a blanket refrain by health care providers when it comes to hard times. His group’s report showed that reimbursements are up from commercial insurers and state Medicaid, while Medicare continued to pose problems.

Slight increases, though, cannot offset the enormous cost of malpractice insurance shouldered by physicians and hospitals in Pennsylvania.

Frank DiCenzo D.O., an ob/gyn in a private group practice in Sewickley, said malpractice premiums are expected to rise well above the $40,000 to $50,000 a year he’s already paying. Three of the youngest physicians in his practice are thinking of leaving the state so they can make enough to pay back student loans, he said.

Without tort reform and malpractice reform in Pennsylvania, DiCenzo said physicians in high risk specialties like ob/gyn, orthopedics and neurosurgery will continue their mass exodus from the state. "When patients can’t see an ob, or get an ortho to fix their leg and have to go to Cleveland Clinic, they will wake up. But it will be too late," he said.

Representatives from the health care purchaser community say empowerment of businesses and patients will help drive health care in the right direction. Cliff Shannon, executive director of SMC Business Councils in Pittsburgh, said purchasers haven’t been able to do much more than "beat our chest" about surplus resources in the healthcare community.

Service shutdowns at St. Francis and Citizens General Hospital, Shannon said, indicate that the market is shaking out hospital beds. "There’s no invisible hand to step in except the marketplace. In some areas, though, the market won’t make a damn bit of difference," he said. "Like cardiac care—there are too many cardiac services and we’ll be getting more, because of the population of people who need those services and the fact that it’s a profit center for hospitals."

Businesses aren’t willing to keep paying more when it’s not necessary, Shannon said. He pointed to PHC4 reports and the work of the Pittsburgh Regional Healthcare Initiative, a consortium of providers, consumers, payers and physicians, as a promising way to address market issues. The Healthcare Initiative’s non-threatening investigations into clinical efficiency, and PHC4’s public reports of clinical and financial outcomes, he said, give groups like his the ability to demand more from their community providers and insurers.

Christine Whipple, executive director of the Pittsburgh Business Group on Health, a coalition of 39 companies representing academia, government, manufacturing and other businesses, agreed that keeping an eye on quality will solve many problems in this market. St. Francis’ elimination of a low volume OB service, she said, is an example of something that could help that hospital, and others, survive. "No one has really been penalized for trying to be all things to all people," she said.