Erlanger protests profit ranking

Erlanger protests profit ranking

September 19th, 2010 by Emily Bregel in Healthlocal

Erlanger Health System's financial status got some national attention this month when a major financial publication ranked the safety net provider as the 12th most profitable hospital in the country.

The problem is, Erlanger says the ranking is way off.

According to Forbes, Erlanger had an operating profit margin of 29 percent, or about $121 million, for the fiscal year that ended June 30, 2009.

That figure is in stark contrast to the 2.13 percent margin the hospital reported in its audited financial statement, where it listed $10.8 million in net income last year.

Erlanger officials are contesting the hospital's inclusion in Forbes' first-ever list of the nation's 25 most profitable hospitals. In a letter to the magazine last week, Chief Financial Officer Britt Tabor said the ranking is "incomplete - and therefore inaccurate."

The ranking is based on information compiled by the American Hospital Directory, an online database, which relies on figures that hospitals annually report to the Centers for Medicare and Medicare Services in the "Medicare cost report."

Erlanger officials said "schedule G" - the section of the Medicare report used by the database - is "obsolete," and hospitals fill out this section of the report inconsistently.

The 29 percent operating margin is based on the exclusion of nearly $130 million in "home office costs" - corporatewide expenses such as legal services, medical records and patient accounts departments - that should have been counted as part of its total expenses in 2009, officials said.

But most hospitals don't report home office costs in schedule G. Erlanger stopped reporting those costs in that section in 2008. That means both 2008 and 2009 cost reports show Erlanger had a double-digit operating margin, using data that American Hospital Directory pulled from that section alone.

But Forbes is standing by its rankings. Stripped of corporate "home office" expenses, the data gives a look at an individual hospital's profit margin based purely on patient operations, independent of systemwide obligations, Forbes reporter David Whelan wrote in a blog.

William Shoemaker, vice president of business services for American Hospital Directory, said that the company's data is based on figures provided directly by hospitals.

"We make the assumption that hospitals are reporting correct information to Medicare. ... We're not making adjustments for any peculiarities. We rely on the hospitals to provide reliable and accurate information," he said.

Eleven hospitals owned by for-profit hospital chain HCA, which owns Parkridge Health System in Chattanooga, made the top-25 list.

The Nashville-based company issued a statement to Forbes that said, "We believe that good quality is good business. If one looks at the performance of HCA hospitals on the national standard measures of clinical performance as published on CMS Hospital Compare, one would find that HCA is among the very best performing health care providers in the nation."

ERLANGER FINANCIALS

* Fiscal year 2010: TBA

* Fiscal year 2009: Profit of $10.8 million

* Fiscal year 2008: Loss of $15.6 million

* Fiscal year 2007: Profit of $15.3 million

Source: Audited financial statements

Health care consultant Michael Millenson of Health Quality Advisors in Highland Park, Ill., said in an e-mail it is "fairly curious" that a safety net hospital, such as Erlanger, would have home office costs that are so high that omitting them skews the figures to such a large extent.

As a safety net hospital, Erlanger absorbs about $80 million in uncompensated care due to patients who can't pay for their care, bad debt and losses from TennCare, hospital officials say.

Erlanger's home office costs in 2009 would equal 32 percent of the hospital's net patient revenues, which were $400 million that year.

David McClure, senior vice president of finance at the Tennessee Hospital Association, said fair comparisons among hospitals are virtually impossible based on Medicare cost reports alone because hospitals report spending differently based on their corporate structures.

For example, hospitals that are part of a multicampus system report their home office expenses separately from daily operating costs included on schedule G, since those systemwide costs can't be counted for every hospital campus for which the system submits a cost report, he said.

For a stand-alone hospital, those expenses aren't pulled out because they're considered part of daily administrative costs and are reflected there. Doing so reduces their reported margin compared to hospitals that are part of a larger parent system, he said.

"If you are a multihospital system, like about 30 percent of the hospitals in this state, you have that cost reflected somewhere else," he said. "You're not exactly comparing apples [to apples]. ... I think it's misleading."

Whelan noted in a blog entry that most of the facilities included in his search - 1,131 hospitals with 200 or more beds - were part of larger health systems, and the majority did not end up with double-digit operating margins using his methodology. The median operating margin was negative 0.27 percent, he said.

Erlanger hospital officials declined to respond to that point directly. It is "completely irrelevant to the entire discussion," according to an e-mail from spokeswoman Pat Charles.