In 2014, North Texas hospitals saw their revenue sail upward along with profit margins, which reached 15 percent market-wide, nearly 3 percent higher than what they generated the year prior despite a steady decline in inpatient utilization.
The data comes from the Texas Department of State Health Services, but was analyzed by Minnesota-based researcher Allan Baumgarten, who’s put together a report analyzing revenue and profitability at the state’s hospitals every other year since 1998. In 2014, the most recent data available, North Texas hospitals continued to inch toward the revenues of their counterparts to the south: Dallas-Fort Worth generated $15.3 billion in total revenue while Harris logged about $16 billion. But North Texas remains the state’s highest margin among hospital systems, 15.3 percent. Harris trails at 13 percent.
Health systems have continued growing, with five flirting with potential statewide presence—HCA, Tenet Healthcare Corp., Baylor Scott & White, the University of Texas, and Christus Health. Part of this is driven by the need to build a larger population base in order to manage their health across the continuum of care, gradually reforming payment models from one that reimburses for volume to one that pays for value. It also helps give them leverage in contract negotiations with payers and the ability to contract directly with large employers. Yet the irony in value-based care remains: systems still need a large population. They’re just using it in a different way, paying for outcomes instead of services. And Medicare is doing some of the pushing.
“Volume remains the major incentive especially for commercial health plans. Medicare is working its way to a tipping point, with the penalties for excessive readmissions, with the move to accountable care organizations or other kinds of value based contracting, but Medicare is moving these provider systems,” Baumgarten says. “Overall, 40 percent of the inpatient days are covered by Medicare here in North Texas so obviously, that means a lot.”
Texas hospitals are benefitting from new enrollees through the Affordable Care Act and the value-based propositions that it’s ushered in. The number of residents with insurance grew by 2.1 million from 2013 to 2015. Meanwhile, hospital systems and physician groups have created 25 Medicare Shared Savings accountable care organizations, 11 of which earned rewards. Capitation payments jumped from 13 percent to 16.6 percent. Which is to say: Inpatient days are continuing their decline, prompting systems to think of new ways to generate revenue and savings.
Dallas-Fort Worth has become one of the state’s most active markets for alignments, mergers, and partnerships. As Baumgarten notes, the trend now is for the provider networks to grow across the state, allowing them to have primary, secondary, tertiary, and quaternary services in order to contract directly with employers.
“This move to statewide networks recognizes that many employers, including those in financial services and retail, are buying benefits for their employees across the state,” he writes. “Expanded delivery systems can negotiate directly with those employers or can market their clinically integrated networks to the key health insurers in the state.”
All but two of the state’s large health systems had revenue of $1 billion or more. In North Texas, Baylor Scott & White Health recorded a net patient revenue of $3.6 billion, with a net income of nearly $735 million. Its margin, according to the report, was 20.1 percent. In a statement, Chief Financial Officer Fred Savelsbergh noted that the system reinvested much of that money into a community benefit, a factor mandated by the Affordable Care Act in order for it to retain its nonprofit status.
“For the fiscal year ending June 30, 2014, Baylor Scott & White’s net operating income margin was 5.4 percent and its net income margin was 8.7 percent. The material difference between these two percentages being earnings from investment income,” read a statement from Savelsbergh. “As a not-for-profit organization, it is through profit margin that we are able to reinvest in the communities we serve – build new facilities and programs, create jobs and provide hundreds of millions of dollars in charity care.”
HCA is the market’s highest-margin system, posting 22.3 percent net income on its $2.25 billion revenues. Just under half of its $501 million net income came from its Medical City Dallas hospital, which accounted for roughly $234 million of that. Medical City Dallas is said to be the nation’s fifth most profitable—in 2013, according to this Health Affairs study, it charged $7.70 for every $1 incurred in patient care cost. The median for American hospitals is $5.40 per $1 incurred. In 2014, Medical City Dallas increased its 31 percent margin from the year prior to 32.6 percent, according to the report.
Medical City Healthcare, formerly HCA North Texas, sent the below statement:
We continually focus on our clinical and operational performance, both of which are key to a well-run hospital that provides the best possible care.
This enables us to reinvest in our communities, expand programs, create jobs and provide significant charity care and uninsured discounts. We have invested or committed $1.5 billion in capital improvements over four-years in order to meet growing community demand, including the addition of new women’s hospitals at Medical City Arlington and Medical City Dallas, increasing emergency services at Medical City Fort Worth and growing trauma care in Collin County with the addition of a much needed burn center at Medical City Plano.
We are proud of our record of caring for our community, which last year included more than $130-million in charity care for thousands of patients and more than $29 million contributed in local taxes.
Texas Health Resources posted 13.4 percent margins on $3.586 billion patient revenue and $481.8 million net income. Methodist Health System posted patient revenue of $1.1 billion with $141 million in net income, a margin of 12 percent. It disputed its total revenue, saying, “Mr. Baumgarten did not include revenue and expenses from our other joint ventures (that existed in 2014), Methodist McKinney Hospital and Methodist Rehabilitation Hospital in Dallas, so had that data been included, the overall number would’ve likely changed.”
Nearly all of these hospital systems have begun spending capital to diversify their offerings and expand without necessarily adding inpatient hospital beds. Baylor Scott & White inked a deal with the Cleveland Clinic that allows national employers to send patients would’ve gone to Cleveland for cardiac care to Baylor’s Jack and Jane Hamilton Heart Hospital and The Heart Hospital Baylor Plano. Methodist Health System became part of the Mayo Clinic Care Network, which allows it to share best practices with the physicians at the world-renowned Mayo.
HCA, since rebranded as Medical City Healthcare, acquired the CareNow chain of urgent care centers. Medical City Dallas announced plans to open a luxury women’s hospital after spending hundreds of millions of dollars on another patient tower. Texas Health Resources acquired 27 freestanding emergency rooms in a joint venture with Adeptus Health, and the Tenet Healthcare Corp. entered into its own joint venture with ambulatory surgical center company USPI, which brings 244 ASCs, 16 short-stay surgical hospitals, and 20 imaging centers nationwide under its auspices.
Texas Health, too, recently formed a health plan with Aetna and spiraled into an impasse with Blue Cross Blue Shield of Texas, which could mean that its 25 hospitals would be out of network. Part of this, Baumgarten suggests, could be because of market confusion around Texas Health’s new network with UT Southwestern, which brings THR’s physician base with UTSW’s specialists. Blue Cross Blue Shield balked at a price increase in its first dealings with the new network, called Southwestern Health Resources. Baumgarten says this will be an interesting trend to watch in the years to come. With all the acquisitions and the partnerships, which will result in success?
“The question is, can you in fact generate enough new business with this network or do the payers just say, what are you doing that’s different?” Baumgarten asks. “Because we’ve got contracts with the UT hospitals, we’ve got contracts with Texas Health, so what value are you adding and why is it worth it for me to contract this way?”
Southwestern Health Resources maintains it will be worth the value. Barclay Berdan, the CEO of Texas Health, notes that the network has already shared in savings through Medicare Advantage to the tune of $30 million.