Patient care doesn't keep Tennessee's hospitals in the black

• Hospital administrators face daunting challenges, particularly in smaller communities.
• Many patients are not financially prepared to pick up larger portions of bills.
• Closures or drastic changes in services are almost guaranteed in the coming years.
• Policymakers need to talk "about a good rural health policy that actually delivers better care."

Mounting costs and shrinking payments are threatening to shutter hospitals around the state, as the expense of providing Tennesseans with vital health care increasingly outweighs the revenue coming in.

Hospitals use gross charges — or the money they charge for services before applying discounts for insurance contracts and Medicare payments, among others — as an indicator of what they need to function. They aren’t getting it.

Gross charges at hospitals across the state had an annual growth rate of 49 percent from 2010 to 2015. But in the same period, the number of adjustments — the contracted discounts, charity care and bad debt that chip away at gross charges — had an annual 61 percent growth rate, according to a USA TODAY NETWORK-Tennessee analysis of the Joint Annual Report collected by the Tennessee Department of Health.

Three hospitals — Lakeway Regional Hospital in Hamblen County, McKenzie Regional Hospital in Carroll County and Dyersburg Regional Medical Center in Dyer County — reported adjustments at 90 percent of their gross charges for 2015. The state average was 76.4 percent that year.

Think of adjustments compared to gross charges in terms of a retailer: If ten shirts come in to a store to sell, then in 2015, 76 percent — or nearly eight shirts — were either damaged, sold at a discounted rate or shoplifted.

The Tennessee Hospital Association prefers looking at revenue rather than gross charges (which the group's president, Craig Becker, described as akin to the manufacturer’s suggested retail price) because that’s what the hospital is actually bringing in.

The last year that total patient revenue covered total expenses was 2010, according to THA data that looks at acute care hospitals with tailored information on top of the health department report. The following year, expenses were $141 million more than patient revenue, and that figure grew to $240 million in 2014 — the most recent year of refined THA data.

As a result, hospitals across Tennessee, in aggregate, are increasingly relying on money from activities that are not directly related to patient care to cover expenses.

There are many issues hitting hospitals’ bottom lines, including (but definitely not limited to):

• Pressure from insurance companies and employers to lower costs.
• Reimbursements from Medicare and TennCare/Medicaid that don’t cover what services cost.
• The potential for people to lose insurance on the individual market.
• Labor costs, in part driven by provider shortages and having to offer higher wages to compete.
• Technology costs, in part to comply with regulations that came about under the Affordable Care Act.
• Changing patient demographics and preferences for where to get care.
• Rising pharmaceutical costs.

Hospital administrators face daunting challenges, particularly in smaller communities, because every day they have to staff no matter whether there is one patient or 100, said Becker.

"You go into work that day: One, you don't know what your revenue is going to be that day because you don't know (whether patients) are non-paying, low paying or commercial," said Becker. "A lot of it right now is ... about chasing the dollar for the care that they provided but they don't get paid for, and balancing all the other issues. It's crazy. It's just insane."

There’s no relief on the horizon.

The financial landscape will get rockier in the coming years as the industry and those who contract with it try to find ways to stem rising health care costs. At the same time, patients want pricey tech-enabled care, and more people with concurrent chronic diseases are aging into Medicare.

These factors and others, including medical advancements, "have made a hospital stay less desirable to the public, and that hospital stay is less desirable to the people who pay for it — the insurers, your employers. That puts hospitals, as a function, in a difficult spot," said Emily Evans, managing director of health policy at Hedgeye. "I don't really see anything good coming down the pike."

Hospitals need a side hustle to stay open

States that expanded Medicaid saw a decrease in charity care, while on the whole, Tennessee’s went up from 2010 to 2014. Legislators' failure to bring Medicaid expansion to a vote still stings executives who grapple every day with what percentage of care will get reimbursed.

Jim VanderSteeg, president and CEO of Covenant Health in Knoxville, said the lack of Medicaid expansion is “a very, very significant challenge and problem for hospitals in our state.”

But the future of expansion is unclear as the new Congress and White House continue to pound for reform. Not to mention, the industry faces pressures that expansion won't fix, experts said.

Hospitals and doctors' offices are relying on people picking up larger portions of the total bill up front — and many patients are not financially prepared to do that.

Several hospitals have closed or drastically changed services in the last few years, and data point to a financial environment that will impact patients across the state.

In urban areas, volume is higher and there is a better balance of payers — Medicare, Medicaid and commercial insurance — but that is beginning to eroded by the number of people with high-deductible health plans.

Evans recounted a recent conversation with a hospital executive who proposed a 5 percent to 6 percent increase in pricing to an insurer. But the insurer, facing pressure from employers, countered with a 1 percent to 2 percent reduction to the existing contract. After years of raising employee deductibles, Evans said many employers think they hit a wall and are trying to get lower negotiated costs.

High deductibles are a burden on family budgets, and often translate into unpaid bills. VanderSteeg said that while more people have insurance, the plans are often more akin to catastrophic-care policies because deductibles are so steep.

Some of the largest hospital operators saw declines in the amount of bad debt after the implementation of the Affordable Care Act. But Fitch Ratings analysts wrote earlier this month that they “are beginning to see signs that the increase in patients’ share of costs” is carving into the earlier gains.

Statewide, the annual growth rate of bad debt grew 29 percent from $1.6 billion in 2010 to $2.1 billion in 2015, according to analysis of the Joint Annual Reports. Bad debt is the unpaid bills of people that hospitals think have means to pay. It is separate from the charity care — or services for those who don't have the means to pay — in the same years. The state data uses gross charges, even though the realistic cost of what hospitals could expect to receive is lower.

"I don't think anybody believes there is any more money in the system," said Fletcher Lance, global health care lead at North Highland.

Hospitals are relying on other revenue sources to keep the doors open.

Revenue from diversification — the corporate lingo for side hustles — grew from $915 million in 2010 to $1.3 billion in 2014, per THA data. On the whole, the state's hospital industry is operating on thin margins that make it difficult to undertake expansions or investment in innovation.

For some hospitals, such as Vanderbilt University Medical Center and St. Jude Children's Research Hospital, additional revenue may come from grants or contributions. Others may get rent from office buildings leased to medical providers, or operate a freestanding surgery center at better margins. Still others could get a boost from investment income.

"Hospitals have to be kind of smart with their money, just like everyone else does," said Mary Layne Van Cleave, chief operating officer of the THA. "We don't get rich from the care we give to patients. That's the world we live in."

Flagship urban hospitals tend to post better financials than smaller community hospitals, which are getting battered by the same, and more, financial and industry pressures.

In 2015, Covenant Health System, which operates two hospitals in Knoxville and seven in smaller surrounding counties, saw its total uncompensated care, including bad debt and charity, come in around $220 million. Its Fort Sanders Regional and Parkwest medical centers in Knoxville write off the most dollars in care, VanderSteeg said — but the smaller rural hospitals, in counties with poorer people and less insurance, have a larger percentage of their care uncompensated.

Hospitals in rural parts of Tennessee rely more heavily on Medicare and TennCare, and people with transportation often opt to travel to the nearest urban area for specialty care. Patients are skewing older and Medicare payments are set for a period of sharper declines. Labor costs are growing.

The dynamic is exacerbating the existing financial pressure because relying on government programs doesn't put a facility in a stable situation — administrators hope to cover someone of the fixed costs, said Don Bivacca, managing director of Healthcare Management Partners.

Tennessee, like the rest of the Southeast, has been more insulated from some of the payment changes that are taking root in the industry, said Lance, noting that California and other Western states have been exposed to different payment-delivery models for a longer time.

Closures or drastic changes in services are almost guaranteed in the coming years as hospital administrators shutter doors or take stock of what people need. It's increasingly triage, primary care and chronic disease management in smaller communities. Industry officials are hesitant to point to individual hospitals at risk because all hospitals operate on slim margins and many factors go into a decision to close.

As hospitals move away from an environment that pays to have heads in the beds, the impact "might seem a little more dramatic because they have been a little more insulated," said Lance.

Hospital closures in rural areas ripple through local economies and put pressure on other parts of the health care ecosystem, such as ambulances or nearby emergency rooms.

The Vanderbilt Health Affiliated Network is trying to link up services and between rural and urban areas while bolstering local hospitals that have community cachet with access to specialized care at Vanderbilt and partner facilities in Memphis and Chattanooga. Such initiatives will be important in reshaping the way people get care across the state, but ultimately experts said there will have to be a re-evaluation of what care people need, what's available and whether a hospital with all the accompanying in-patient services is needed.

Community hospitals are increasingly open to partnering, affiliating or merging with larger entities as a way to get better pricing on supplies, combine back office and billing capabilities, and get access to specialists. Many, particularly in East Tennessee, are linking to larger facilities in more urban areas using telehealth technology, allowing specialists to evaluate patients from an hour or more away.

Questions about how hospitals adapt remain. Becker said there's no doubt that others will close in the coming years.

Lance, who spends time around Ripley, Dyersburg and Covington, said hospitals are under tremendous pressure and that the industry needs to start evaluating what people need, and what can be provided to impact the quality of life of residents.

Policymakers and industry leaders, Evans said, need to pay attention to the changing demographics and financial constraints to "start talking about a good rural health policy that actually delivers better care."

Kristi Nelson contributed reporting.

Reach Holly Fletcher at hfletcher@tennessean.com or 615-259-8287 and on Twitter @hollyfletcher.