By Howard Fischer
Capitol Media Services
PHOENIX -- Arizona hospitals overall saw huge increases in their profits last year despite -- or more likely, because of -- COVID-19.
New figures from the Arizona Health Care Cost Containment System said total profits topped $1.5 billion. That is 33 percent higher than in 2019 and far above anything reported in the past decade.
It also found nearly 75% of hospitals with a positive operating margin. While there have been higher figures in the past, that is still up 4.5 percentage points from the prior year.
And the average profitability was $13.9 million.
Still, there are vast differences -- even among hospitals under the same management.
Banner Desert Medical Center in Mesa, for example, posted a net operating profit of more than $153 million on total revenues in excess of $802 million for a net operating margin of 19.1%. And Banner Thunderbird has a $96.7 million profit with a net operating profit of 16%.
But Banner University Medical Center in Tucson actually posted a nearly $5.5 million loss on revenues of more than $866 million. Still, the hospital is in a far better financial condition that 2019 when it lost almost $55 million.
All this comes against the backdrop of COVID.
During 2020, Gov. Doug Ducey imposed a ban on elective surgeries, at least in part to ensure that there was an adequate supply of personal protective equipment -- masks, gowns and gloves -- to handle the anticipated surge in the number of people hospitalized with the virus. That, however, drew some criticism from the Arizona Hospital and Healthcare Association.
Spokeswoman Holly Ward said her members were hemorrhaging money because they've lost the more financially lucrative business of things like knee and hip replacements.
And then there was the cost of all that personal protective equipment.
But Marjorie Baldwin, a professor of economics at the W.P. Carey School of Business at Arizona State University, said there is another side to all this.
It starts, she said, with the change in the mix of patients.
"Typically, hospitals treat a majority of older patients on Medicare,'' said Baldwin who is a health economist. By contrast, COVID provided a larger mix of younger patients that might otherwise not be in a hospital.
More to the point, the private insurance these patients often have pays more than Medicare.
Then there's the fact that hospitals are not racking up the same losses for "uncompensated care,'' bills not paid by people without either government or private insurance and who lack the financial resources to pay their bills. That's because the federal government agreed to pick up the cost for treating COVID for anyone without insurance.
"That's a huge effect on profits,'' Baldwin said.
On top of that there were various federal subsidies to hospitals to help deal with the costs incurred of treating COVID patients.
But potentially the biggest thing has to do with medical billing and something called "diagnosis related groups,'' or DRGs.
That system, already in use by Medicare, pays hospitals based on the DRG. That is designed to both standardize payments and encourage cost containment as a hospital knows it will be getting a specific set amount to treat a specific ailment, not more.
So someone admitted for a ruptured appendix is in one DRG, versus a women undergoing standard labor.
But Baldwin said if a patient was diagnosed with COVID, there is a surcharge that hospitals are allowed to impose.
It's even more complex.
That surcharge is built on the assumption that COVID patients will require a certain level of care.
"But some COVID patients might not require ICU care or the intense care that the subsidy was designed to cover,'' she said. "And so hospitals could make a profit on those patients.''
And there's more.
And Baldwin said a patient who actually tests positive for COVID actually might be admitted to the hospital for some other reason.
"But the hospital could still put that they have the COVID diagnosis and get the reimbursement,'' she said. "And there's strong incentives for hospitals to do that.''
There are other things that have happened on the state level, even before COVID, that have worked to improve the bottom lines of hospitals.
As governor, Jan Brewer pushed through a measure to expand eligibility for AHCCCS, the state's Medicaid program. And she came up with a scheme to pay for it through a tax on hospitals.
But here's the thing: It was structured so that each hospital chain would pay less in the assessment than it would make up by having fewer uninsured people coming to emergency rooms unable to pay. So hospitals all supported it.
It apparently worked.
In 2013 the average hospital had $8.9 million of uncompensated care, 6.7% of its total expenses. By 2020 that figure had dropped to $4.3 million, or 2.5%.
Ducey, state treasurer at the time with his eyes on the governor's office, campaigned against AHCCCS expansion.
But now, with it in place, he actually expanded on Brewer's funding method, signing legislation last year to create the Health Care Investment Fund. That is a totally new assessment that, after all is said and done, will mean a $900 million net increase for hospitals in 2021.
Baldwin said large urban hospitals already were in a better position to deal with COVID.
That is reflected in those numbers for Banner Health, the largest hospital system in the state, and, specifically, in their larger facilities.
A spokeswoman for Banner said staffers were still reviewing the numbers and declined to immediately comment on the report.
There was a similar pattern at Tucson Medical Center, where its $34.2 million profit on $613.2 million in income is a $6.7 million increase over the prior year.
Hospital spokeswoman Angela Pittenger cited some of the same issues as did Baldwin.
"The reduction of elective surgeries created a significant negative impact on hour hospital's operating margin,'' she said. And without the federal aid, Pittenger said, 2020 "would have been financially devastating'' to the hospital.
Those additional dollars, she said, bolstered the hospital's bottom line and positioned it to invest in staff and other resources.
And Pittenger also cited that Health Care Investment Fund which kicked in in October 2020.
Baldwin said that, by contrast, some smaller "safety net'' hospitals were not doing as well.
Copper Queen Community Hospital in Bisbee did manage to post a profit of nearly $657,000 on $42.6 million in income. But that profit is nearly $5.9 million less than the year before.
And Yavapai Regional Medical Center, found its profits shrinking by nearly $16.9 million between 2019 and 2020, though it still managed to post a $50.5 million profit on $372.7 million in income.
