Study: Big hospitals outside Twin Cities grow profits

A few large hospitals outside the Twin Cities were very profitable in 2015, a new report finds, even as many small rural medical centers in Minnesota posted relatively low margins or outright losses.

The annual study from Allan Baumgarten, an independent health care analyst in St. Louis Park, adds a wrinkle to a report last month from the Minnesota Hospital Association that found rural hospital systems have been lagging those in the Twin Cities in terms of median financial performance.

Baumgarten drew on different data focused primarily on hospital services, and found outstate health systems often include one or two big hospitals that post sizable profits. The large sums more than offset the financial results, he said, of smaller medical centers in rural areas that are affiliated with the health systems.

"These large hospital systems that are outside the Twin Cities — some of their large hospitals like St. Cloud Hospital or like Mayo Rochester are doing very well," he said. "Within those systems, some of the smaller hospitals are losing money. But it pales by comparison to how well the major hospitals within those systems are doing."

The Minnesota Hospital Association argued that Baumgarten's report is flawed because it primarily factors revenue and income for hospital services, and doesn't reflect overall health system financials, including everything from clinics and nursing homes to ambulance services.

Those non-hospital services often generate lower profit margins or financial losses, so the "net income/margin data reported [by Baumgarten] is overstated by a factor of 2 and 3 times," the hospital association said in a statement.

The trade group said it disagreed with Baumgarten's comment that some large hospitals beyond the Twin Cities are doing very well, saying instead that those medical centers "have net margins that are sustainable."

"Bottom line, this report overstates the financial health of Minnesota's hospitals and health systems," the Minnesota Hospital Association said in its statement.

Hospitals raised similar objections when researchers from Virginia and Maryland published a 2016 study suggesting that prominent medical centers in La Crosse, Wis., Rochester and Sioux Falls were among the 100 most profitable hospitals in the country.

In the new report, Baumgarten found that 52 major hospitals in outstate Minnesota and nearby states collectively increased their profit by 15 percent between 2014 and 2015, growing net income for the group to $1.25 billion. Net income for 31 hospitals in the Twin Cities, by contrast, declined a bit during the time period to $548.1 million.

"Outstate hospitals have enjoyed strong and growing profits in recent years, on average higher than those of Twin Cities hospitals," the report states. "Rural hospitals have benefited from the coverage expansions and other provisions of the Affordable Care Act, but are deeply concerned about how the possible repeal of the law would affect them."

A summary of the report added that outstate hospitals saw profits increase by 22 percent in 2014.

During 2015, the Mayo Clinic's hospital in Rochester posted $503.1 million in net income, Baumgarten said, while five smaller Mayo Clinic hospitals in southern Minnesota collectively lost nearly $8 million.

St. Cloud Hospital posted net income of $170.5 million while smaller hospitals in the St. Cloud-based CentraCare system collectively posted about $14 million in net income. The pattern was similar for South Dakota-based Sanford Health, Baumgarten said, which operates several small hospitals in rural Minnesota and large medical centers in Sioux Falls and Fargo.

"Those hub hospitals in these outstate systems make the system as a whole a very powerful entity," Baumgarten said, adding that more small rural hospitals are merging into large systems. "It's almost as if these hub hospitals of these outstate systems are exerting a gravitational pull that draws patients and hospitals and physicians."

JoAnn Kunkel, the chief financial officer at Sanford Health, said in a statement that Baumgarten's report failed to recognize "a whole host of services that hospitals and health systems provide and subsidize that benefit our communities and patients."

Mayo Clinic issued a statement saying: "With an integrated health care delivery system, Mayo Clinic's financial picture is not limited to our Minnesota hospital practice."

CentraCare offered similar comments, saying non-hospital services "rely on solid financial performance from other areas of the system in order to remain financially viable and benefit the community."

The Minnesota Hospital Association report from last month disclosed systemwide figures. It found that rural hospitals repeatedly lagged those in urban areas in terms of median operating income from 2012 to 2015. Operating income includes earnings from patient care, whereas net income also factors income from investments and nonoperating sources.

The trade group's report included specific results for 70 health systems across the state, and found that 21 lost money on operations during 2015. None of the money-losing hospital systems was based in the Twin Cities metro.

Net income figures during 2015 in the hospital association's report for Mayo Clinic ($389 million), CentraCare ($60.5 million) and Sanford Health ($169 million) were lower than the figures reported by Baumgarten.

Baumgarten said he agrees the data he draws on is limited to the hospital facilities, so the numbers don't portray a comprehensive view. Even so, he defended his methodology.

"However, the hospital operations are by far the largest component of the health system and account for most of the system's revenue and expenses," he said via e-mail. "Further, there are no alternatives sources of comprehensive data on health system finances that are uniformly reported and publicly available."

Christopher Snowbeck • 612-673-4744

Twitter: @chrissnowbeck