With profits down, future of Mass. hospitals questioned

As they brace for an era of shrinking government funds and mounting pressure to cut prices for medical services, Massachusetts hospitals face growing financial strains.

Two dozen — more than a third of the state’s total — lost money last year, including rural community hospitals, urban safety net hospitals, and even affiliates of renowned academic medical centers, according to a new report from the Division of Health Care Finance and Policy.

Among the biggest money losers were Boston Medical Center, which posted a $25.1 million deficit, Steward St. Elizabeth’s Medical Center in Brighton, which lost $20.9 million, and Quincy Medical Center, which was $18.5 million in the red.

The industry’s performance was worse than in 2010, when 16 hospitals posted losses, and in 2009, when 13 were unprofitable. Overall, profit margins for the state’s 65 acute care hospitals fell to a razor thin 2.1 percent in 2011, compared with 2.6 percent the prior year, the state report said.

Those numbers provide a financial snapshot of a health care market that was scrambling to adjust to rapid changes even before the Massachusetts Legislature passed a law this summer designed to rein in soaring medical costs.

With the state’s intensified focus on affordable care and additional cuts projected for Medicaid and Medicare, the government health insurance programs for low-income residents and seniors, the future of many hospitals across the state is uncertain. In some cases, their survival may be in doubt.

“It’s going to be musical chairs,” said Donald J. Thieme, executive director of the Braintree-based Massachusetts Council of Community Hospitals. “When the music stops, I think we’re going to be short a couple of teaching hospitals and maybe a few community hospitals.”

But unlike an earlier period of consolidation in the 1980s and early 1990s — when dozens of small hospitals were shuttered — Massachusetts health care leaders say a more likely scenario this time will be for hospitals to specialize in some services, abandon others, and join integrated networks to strengthen their financial foundations.

“Everybody has to decide who they want to be and how they fit into the larger scheme,” said Ron Bryant, chief executive of Noble Hospital, an independent 75-bed facility in Westfield that lost $1.7 million last year. Bryant said Noble is focusing on community health services, referring more complex cases to nearby Bay State Medical Center in Springfield.

“We’re going to provide the services people need close to home — whether it’s radiation, blood work, day surgeries — and we’re going to do it better than anyone else,” Bryant said. “But we don’t pretend to do everything.”

The state cost-control law approved this summer, along with last year’s federal health care overhaul, are pushing hospitals toward coordinated care while encouraging payment models that reward providers for improved patient outcomes rather than for ordering more expensive procedures. In such an environment, every hospital needs a strategy for moving forward, health care analysts said.

“The ones that are building for the future will be fine, though it may take a while,” said Nancy Kane, management professor and associate dean for educational programs at the Harvard School of Public Health in Boston. “The others . . . some of them may go.”

To avoid that fate, many smaller hospitals already are banding together or linking up with larger systems.

Last month, Heywood Hospital in Gardner struck a deal to merge with nearby Athol Memorial Hospital, creating a stronger player in the rural North Quabbin area outside Worcester. In Lowell, crosstown rivals Lowell General Hospital and Saints Medical Center agreed in March to form a single community hospital.

Milton Hospital in January completed an affiliation with Boston’s Beth Israel Deaconess Medical Center, which is also negotiating an alliance with Brockton Hospital. South Shore Hospital in Weymouth and Hallmark Health System in Medford are in talks to align with Boston-based Partners HealthCare System, the state’s largest hospital and physicians organization.

And Steward Health Care System, a Boston system formed by buyout firm Cerberus Capital Management in 2010, has snapped up 10 community hospitals from Quincy to Haverhill.

Many of these hospitals are grappling with financial losses or declining profits at a time when they are having to invest heavily in new electronic medical records and other information systems as well as new clinical programs to enable coordinated care.

The roster of money-losing hospitals includes not only so-called safety-net institutions such as Boston Medical Center and Cambridge Health Alliance — which treat large numbers of low-income patients and are most dependent on government payers — but also three Partners hospitals, including Faulkner Hospital in Jamaica Plain and North Shore Medical Center in Salem, and eight hospitals now owned by Steward. Also on the list are Beth Israel Deaconess Medical Center-Needham and Boston’s Dana-Farber Cancer Institute.

In some cases, the losses stem from one-time events, such as Dana-Farber’s spending to build its Yawkey Center for Cancer Care. In others, like the Needham campus of Beth Israel Deaconess, the weak economy came into play, forcing patients to delay elective procedures for fear of losing their jobs if they took time off from work.

Steward — which had owned its hospitals for less than a year when the 2011 fiscal year ended — was spending heavily on capital improvements. Multi-hospital organizations, like Steward and Partners, say their broader reach allows them to offset losses at weaker hospitals with financial gains in other parts of their businesses.

Smaller medical centers have fewer resources and less clout in negotiating payments with insurers. Some are buckling under the weight of mounting pension liabilities. In addition, hospitals are being pressured by state government and commercial health plans to reduce costs by conducting fewer imaging tests and lowering the number of patients treated in emergency rooms. Under the traditional fee-for-service payment contracts many hospitals still have with insurers, however, they aren’t rewarded for those money-saving steps.

“We’re caught in that awkward time when we’re telling everybody to restructure and transform, but the payment systems are lagging,” said Kane at the Harvard School of Public Health.

But the biggest economic factor for many hospitals, especially those serving low-income communities, is Medicaid funding cuts. In essence, the state is prodding hospitals to control expenses even as the government reduces funding critical to their medical operations.

“Massachusetts health care reform will advance cost control, but it doesn’t address the underpinnings of Medicaid, which will worsen in 2013,” said Kate Walsh, chief executive of Boston Medical Center. Medicaid payments typically don’t cover the entire price of health care provided by Boston Medical Center, where roughly half of the patients are covered by Medicaid or other low-income health insurance programs.

Like other hospitals, Boston Medical Center has been aggressively slashing operating spending and reengineering its business model to strengthen ties with neighborhood health clinics. Such measures are likely to accelerate in the coming year at hospitals big and small, as they try to find their niche in the state’s evolving health care marketplace.