Hugh nonprofit system feels pressure to cut costs, merge and get bigger

National Catholic Reporter, June 16, 1995 by Arthur Jones

Nonprofit and for-profit entities in different industries cannot be fairly compared, because of diffeent risk factors, different expectations for return on revenue and the like, but four examples show the scale, at least, of the relative amount of profits the Catholic systems handle.

These 1991 figures from Modern Healthcare and Forbes magazines show:

* Cincinnati's Mercy Health System's 1991 net income was $39.5 million; Cincinnati Gas and Electric net profit that year was $40 million.

* The Sisters of Charity, Leavenworth, Kan., had $55 million net income in 1991; Circuit City, an electronics chain, had $55 million in profits.

* The Daughters of Charity, St. Louis, at $176 million net income, had as much left over at the end of 1991 as Northrop Aerospace.

* The Sisters of Mercy's $74 million net income equaled that year's average for each corporation in the U.S. food and tobacco industry.

Though these net incomes are notable, what they are called on to do also is considerable, as will be seen.

Health care economics and accounting is a peculiar world, one in which closing a hospital can be more profitable than running it. In some instances, when a Catholic health system sells a hospital to a for-profit chain, which then closes the hospital, everyone makes money. The buyer, because of accounting procedures in closing the hospital, is able to bill Medicare for reimbursements on a different -- and more remunerative -- basis than was the operator.

Professor Thomas Prince, also of Northwestern's Kellogg School, framed the overriding factor in hospital revenues and net income thus: Unless a hospital -- Catholic or otherwise -- makes 8 percent annually on net patient revenues, it will not have sufficient resources to maintain its medical technology or to support changes in medical practices. And in the highly competitive health care world, "if you don't have those two capabilities," said Prince, "you will very quickly go down."

It is fairly statistically certain, Prince said, that once that figure drops below 7 percent, it will subsequently drop quickly to around 5.5 percent, and then the hospital is in serious trouble. And many Catholic hospitals are in serious trouble, Prince said, primarily because they invest too much in technology and avoid shared services with other hospitals by trying to do everything alone (see accompanying story).

Researcher Shortell has been immersed in the consequences of current change as the principle investigator in a recent integration study funded by nine health care systems, three of them Catholic. The aim was to identify the characteristics and challenges the systems face as they try to reorganize patient care and to integrate their systems.

Earlier this year, Shortell wrote, "The challenge for Catholic health systems will be to work with local non-Catholic providers (for) at the local level often there are not enough Catholic organizations to meet all the needs."

Further, he said, "some people continue to get very good care, but we still have the uninsured -- now up to 41 million (from 38 million in the early 1990s)."