Market myths

(First in a series)

Market myths appear to be a primary culprit behind the ongoing financial mayhem at Dickinson's St. Joseph's Hospital and Health Care Center.

An analysis by new CEO Claudia Eisenmann during her first 90 days on the job shows St. Joseph's market is much smaller than what many people have been led to believe for a number of years. Planning for the facility's oncology center that opened in 2000 also apparently was based upon larger assumptions at a time when reimbursements for the program were ready to be slashed.

Constructing a new addition to house the oncology center and expand other existing services also resulted in the hospital using all of its cash reserves. The end result is the entire oncology program is closing July 1.

St. Joe's cumulative operating loss since 2002 is expected to reach about $13.2 million by the end of the current fiscal year at the end of this month.

"The sky isn't falling. The sky fell a long time ago and for whatever reason, the individuals who had the operating authority here at the hospital did not react to it," Eisenmann said.

It's also been long believed that a large number of residents in St. Joe's immediate market area don't use the facility and instead go to Bismarck and elsewhere for health care service. That's also not true, Eisenmann said.

"There is some outmigration from the Dickinson Clinic, but the real emphasis is on that word some. It is nowhere near what I thought it was until I did this market analysis and saw where the patients were going and why," she said. "They've been blamed for transporting all of these patients out of town and it just isn't true. Some of them yes, most of them no."

The hospital lost money during fiscal year 2002, basically broke even during fiscal year 2003 and has lost money since.

"The decline in profitability has increased in that period of time each year," Eisenmann said.

Admission numbers

A review of the hospital admissions shows the only growth has occurred in "swing bed" or skilled nursing patients, which is really a long-term care service, not a hospital-based service, she said.

"You look at the hospital side, it's basically stayed flat or slightly trended down. So it tells you something in what's going on in our market, and it's been that way since 1997," Eisenmann said.

The average daily census for the hospital in true hospital service patients is 25 or less over this entire time. This statistical fact qualifies the hospital to apply for a "critical access" designation, which provides much better reimbursement for St. Joe's Medicare patients, who represent about 50 percent of the facility's market.

Unfortunately, pursuit of a critical access designation never occurred, because decision makers were always given a larger commingled number for average daily census that added hospital-based and skilled-nursing patients together.

"This hospital should have converted to critical access; there is no question that should have been done," Eisenmann said.

She said the commingled census figures created a lot of false hopes for the local board of directors and Catholic Health Initiatives, which owns the hospital.

"It was a shame, because again, people thought that information was credible and it was not credible," she said.

"One of the things that Joe public thinks is that all hospitals are the same, and they are not. Because they all have different kinds of designations and licensure and whatever," Eisenmann added. "When you have a critical access designation, you have many, many preferred mechanisms built into that, whether it's for financing or reimbursement or whatever."

Reimbursement woes

Without the critical access designation, St. Joe's finds itself in a contradictory position when it comes to reimbursement from Medicare and Blue Cross/Blue Shield of North Dakota.

"Medicare classifieds us as a rural hospital, which is good, that is what we are, a rural hospital. Unfortunately, they are under the mistaken impression that labor costs are cheaper in a rural hospital than they are in an urban hospital," Eisenmann said.

Part of Medicare's method for determining payment is based upon a "wage index," which is quite low, she said. That wage index also is going down for the hospital in October, which means the Medicare payments that already don't come close to covering costs are going to get worse.

Meanwhile, Blue Cross/Blue Shield takes a different view of St. Joe's from a classification standpoint.

"Whereas the federal government recognizes us as rural, Blue Cross is under the odd impression that we are urban. Because of that, we get lower reimbursement rates for our inpatient services than rural providers get," Eisenmann said.

Blue Cross/Blue Shield does its classifications based upon total claims, she said.

"And because we do have a high enough outpatient total revenue that comes through here, that bumps us," Eisenmann said.

Another reimbursement issue is the state Medicaid program, which has long been known as one of the worst in the country.

"Even though folks at the state level understand there are problems with Medicaid, even the last legislative session, and people fought hard to get increases in Medicaid, we were only successful in getting a 5 percent increase for next year and a 4 percent for the following," Eisenmann said. "And that won't even keep pace with inflation."

The implementation of the final phases of the Balanced Budget Act in 2000 also changed features of reimbursement for some specialty programs, which caused additional substantial cuts.

"So you have all of these reimbursement-related things that are primarily strategic in orientation that were happening simultaneously. At the same time, charity care is going up, bad debts are going up," she said. "This hospital in the last three years alone has provided $3 million worth of charity care and had an additional $3 million in bad debts."

The diagnosis

The hospital gets the lion's share of the Medicare, Medicaid and no pay population. So the only other place to go is to see what's really happening is with Blue Cross/Blue Shield discharges, because those are true numbers of people who are utilizing services, Eisenmann said.

It wasn't until she dug deep into the individual diagnoses of the Blue Cross/Blue Shield patients that Eisenmann truly understood what the scope of the market's potential, and why previous strategies had failed.

"There wasn't the market to support them," she said. "It is pretty much the linchpin in understanding what has happened here."

By looking at the Blue Cross/Blue Shield figures, not only did Eisenmann discover the much smaller size of the market, but also the fact that St. Joe's already is getting the majority of those patients.

"This is a very small market. This is a small market that needs a small, community, primary-care oriented hospital," she said. "Until you do an extremely in-depth review of the market, and I mean going down to the level of the specific diagnoses that are treated here and are leaving here, going to Bismarck for example, you don't understand how small this market really is."

There are only certain services, however, that St. Joe's is ever going to be able to provide.

"Even the clinics and the hospital together, there has been kind of this thought that if we just go out and get very aggressive and recruit more physicians, we'll improve our market share insurmountably. And we'll be successful here, if you define success as profitability," she said.

The reality is, however, you can recruit and spend a lot of money, which has been done over time here, and then see doctors leave in a short period of time.

"The reason why they didn't stay is once their income guarantees ended ... there wasn't enough market for them to be at the same income level on their own. So they left," Eisenmann said.

When you think the market is bigger than it is, you build around the bigness of it. But when you finally do the analysis and realize it is small, that changes your strategy, she said. The Blue Cross/Blue Shield executive summary for St. Joe's market refers to percentages that lead one to believe there is a huge opportunity here, Eisenmann added.

"There are so many issues related to market analysis. A percentage is only part of the equation because you still have to know what 'n' is," she said. "And then you have to know what makes up 'n.' And all of that, once you look at that, would change your percentage in terms of the market you could capture, given your capabilities in your hospital."

From an operations standpoint, Eisenmann said labor costs continue to rise, cost of physicians continue to rise, facility improvements are required, salary adjustments are needed and the cancer center that erased the cash reserves has never been profitable.

"So when you combine all of those reimbursement realities, along with having no cash because it got invested into a program that was hoped to be a viable program but wasn't, it never made money, you wind up with an organization that can quickly get into financial distress, and that is exactly what happened," she said. "And it has not been able to pull out of it; the situation has worsened every year."

Next: Where does the hospital go from here.