Minnesota's largest hospital systems saw big jump in 2014 income

Income surged in 2014 at Minnesota's biggest hospital operators.

As a group, 10 of the largest hospital systems in Minnesota saw operating income jump by 38 percent in fiscal 2014 compared with the previous year, according to a Star Tribune analysis. Combined earnings hit the highest mark in four years.

Two hospital systems spearheaded the increase, sparking income growth by putting the brakes on hiring.

More broadly, hospitals cited a complicated mix of factors ranging from a bad flu season and increased income through mergers, to better reimbursement from health insurance companies.

Hospitals offered a mixed verdict on the effect of increased health insurance coverage under the federal health law. Some said it made a difference, while others downplayed the financial impact.

Collectively, the 10 large systems posted operating income of $628.7 million on revenue of $17.8 billion, up from collective income of $455.5 million the previous fiscal year.

Analysts say they haven't yet finished tallying financial results across all hospitals in 2014, but said the Minnesota results seem on par with, if not a little better than, those reported elsewhere.

"Minnesota hospitals have always done relatively well," said Kevin Connolly, an ­analyst with Moody's Investors Service, who cited the state's healthy economy and high rate of health insurance coverage. "Minnesota has been ahead of the game in terms of how they manage their costs."

The Star Tribune analysis pulled figures from audited financial statements for 10 of the largest health systems in Minnesota in terms of hospital beds they operate. Financial results reflect not just hospital operations, but also everything from clinics and pharmacies to home care and medical transportation, depending on the health system.

The tally does not include the Rochester-based Mayo Clinic, which accounts for income differently than other hospital systems in the state. Earlier this year, Mayo Clinic reported record income of $834 million on $9.7 billion in revenue in 2014, a 36 percent jump in income over the ­previous year.

Whereas Mayo Clinic's numbers include investment income, figures for the 10 hospital systems in the Star Tribune analysis only include income from such operations as patient care.

Collectively, the 10 hospital systems operated about 64 percent of the available hospital beds in the state during 2013, according to data from the Minnesota Department of Health. Mayo Clinic, meanwhile, operated about 15 percent of the state's hospital beds at that time.

While large hospital systems control most beds in the state, officials with the Minnesota Hospital Association say the financial results should not be generalized to all hospitals.

The trade group is conducting its own analysis, which includes figures just for the Minnesota portion of Mayo Clinic. Preliminary results for 132 hospitals show total operating margin of more than $1.39 billion for 2014 compared with about $1.02 billion for 2013, for an increase of 36 percent for the group.

The Minnesota Hospital Association sees more stability in the numbers than change, saying the median operating margin increased from 2.6 percent in 2013 to 3.2 percent last year. The trade group's larger data set includes 39 hospitals that had negative operating margins totaling $108.3 ­million in fiscal 2014.

"Some can be doing really well, and some can be struggling," said Matt Anderson, senior vice president of policy and strategy for the trade group. "It's very difficult to paint with a broad brush, and assume it applies to every organization."

When Mayo reported record financial results in February, clinic officials noted that expense control was a key factor. In particular, salary and benefit costs declined by 1 percent — a significant number, since labor costs accounted for nearly two-thirds of the clinic's $8.9 billion in expenses last year.

Slower growth in salary expense also was part of the story in fiscal 2014 at Sanford Health and Hennepin County Medical Center.

At Sanford, Chief Financial Officer JoAnn Kunkel said fiscal 2013 expenses were up with the opening of a new hospital in Aberdeen, S.D., and growing pains from acquisitions in previous years.

In 2014, the system eliminated positions through attrition, and cut costs by using its larger size to negotiate better deals with suppliers. Sanford Health's operating income jumped from $30.8 million in fiscal 2013 to $110 million in the year ending June 30, 2014.

Among the hospital systems in the Star Tribune analysis, two of the largest chunks of income growth came at Sanford Health, which generates nearly 90 percent of its net patient revenue from outside Minnesota, and HCMC, which swung from an operating loss of $28 million in 2013, to income of $6.3 million last year.

The hospital and its growing network of clinics staffed up in 2013, adding the equivalent of 293 full-time workers in expectation of more patients seeking services. The growth didn't materialize as quickly as expected, so HCMC pulled back on hiring. The hospital added the equivalent of 38 full-time workers last year.

"The hiring pace relative to 2014 has picked up a little bit, but that's because the growth has also picked up," said Larry Kryzaniak, chief financial ­officer.

At Minneapolis-based Allina, operating income in 2014 grew by 9 percent, or more than $12 million, to $146 million. While that might sound like a big change, Chief Financial Officer Duncan Gallagher said the results actually were comparable with 2013 after adjusting for revenue growth.

Some revenue growth came from 2013 mergers with Golden Valley-based Courage Center and Regina Medical Center in Hastings. Allina also saw a reduction in uncompensated care costs in 2014 "that is directly related to the benefit of the Affordable Care Act, and more folks moving to the ranks of the insured from the ­uninsured," Gallagher said.

There were health law benefits in the financial results at North Memorial Health Care in Robbinsdale. The law expanded the state-federal Medicaid program, and North Memorial typically sees a high share of patients with Medicaid coverage, said Chief Financial Officer Todd Ostendorf.

North Memorial reported an operating margin of 1 percent for 2014, which was its highest margin since 2006. Better reimbursement from health insurers was a key ­factor.

"We were being underpaid relative to the market," Ostendorf said. "We're not looking to close the gap fully, but we're looking to close a large ­majority of it."

Minneapolis-based Fairview reported an operating income increase of 9 percent, or more than $12 million, to $147 million, but said the federal health law was not a significant factor.

The health law wasn't one of the top factors listed by Dave Dziuk, the chief financial officer at Bloomington-based HealthPartners, as he described financial results for Regions Hospital and Park Nicollet.

The flu hit hard at the end of 2014, and drove more patients to the hospital, Dziuk said. In the second year of HealthPartners' merger with Park Nicollet, the larger system negotiated better deals with IT providers and medical suppliers, saving more than $10 million.

HealthPartners is also one of the state's largest health insurance companies. From the insurer's perspective, is a 38 percent increase in operating income for big Minnesota hospitals troubling?

No, says Dziuk. Translate the figures into an operating margin, and they're still between 3 percent and 5 percent of revenue.

"If they were losing money, I'd be worried," he said. "If they were making over 5 percent margins, I guess I'd be a little more excited, over a sustained period time."

As a percentage of revenue, hospitals in the Star Tribune analysis earned 3.5 cents of operating income per dollar of revenue in fiscal 2014. That compares with operating income at 3.0 percent of revenue in 2011, 3.2 percent of revenue in 2012 and 2.7 percent of revenue in 2013.

"A 3.5 percent margin overall is healthy, and not beyond a reasonable level," said Nancy Kane, a professor of management at the Harvard T.H. Chan School of Public Health. "I think now, more than ever, they really need the capital to invest in the future."

Christopher Snowbeck • 612-673-4744

Twitter: @chrissnowbeck