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Lodi Health at a crossroads

Health care reform law, drop in census numbers point to changes in the future

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Carol Farron

Joe Harrington

Posted: Saturday, June 22, 2013 12:00 am

On a March afternoon 61 years ago, a man in a suit and tie cut the ribbon, officially opening Lodi Memorial Hospital to some 8,000 visitors present for the 2 p.m. open house.

The women in wide-brimmed hats and children in striped T-shirts were eager to tour the three-story building on South Fairmont Avenue they had watched workers build in the middle of a field for more than seven years.

The 55-bed hospital was equipped with two surgery rooms, two delivery rooms, two nurseries and two incubators donated by the Ladies Hospital Auxiliary.

The ribbon-cutting ceremony, which included a prayer by First Methodist Church Rev. Edwin Sweet, was the culmination of a dream held by a small forward-looking group of local farmers, bankers, teachers and homemakers to create a community hospital.

Since opening its doors a month later in 1952, the hospital has served one million patients, delivered countless babies and offered hundreds of specialized community classes from breastfeeding 101 to how to become a safe babysitter.

In 1952, most of the population paid directly for care. Government involvement was minimal to modest.

Today, that’s all changed. Most patients now have employer insurance, Medicare — or no insurance at all.

That community hub envisioned 61 years ago by local citizens is now part of a broader organization trying mightily to reinvent itself. In coming months, the hospital itself will likely continue to be downsized as the organization seeks to expand into other areas, such as home health care and preventative care.

It is an ambitious transformation with high stakes, including hundreds of jobs and the quality of health care for many Lodi residents.

And it is a transformation with no guarantees of success.

A focus on outpatient care

As far as private, nonprofit, independent hospitals go, Lodi Memorial is probably healthier than most, Chief Executive Officer Joseph Harrington said.

That’s because it is uniquely positioned with not only a hospital, but 58 separate businesses and affiliates. Those include several medical practices, a durable medical-equipment company, a home-health agency, outpatient surgery centers, child care and adult day care and more.

“For several years now Lodi Health has been laying the ground work to care for more individuals in an outpatient setting where much of the efforts of health care reform are focused,” Harrington said in an email. “Also we have been ahead of the curve in developing infrastructure that will allow us to hit the ground running with health-care reform.”

Under reforms, one goal is to cut potentially preventable re-admission and focus on patient safety and quality of care.

But Lodi Health still must generate revenue in order to keep the hospital doors open — and is turning to outpatient services to help fund that.

Reflecting a national trend, Lodi Health provided 224,160 outpatient services last year for everything from well-baby check ups and physical rehabilitation services to in-and-out surgeries and refilling prescriptions at any of its sites.

An operating room has fixed costs, and simply put, if you can get more patients in and out every day who don’t need room and board, any profit goes straight to the bottom line. The cost for tools like blankets and skin marking pens are itemized on patients’ bills, but can be used over and over again.

According to a survey by the research firm McKinsey & Company, outpatient emergency-room care alone averages an operating profit margin of 15 percent and non-emergency outpatient care an average of 35 percent. That compares to in-patient care at nonprofit hospitals, which often don’t see a profit due to set reimbursements through Medicare and private insurance.

As a business, Lodi Health is substantial: It employs 1,330 people and had operating revenue of $189 million in 2012.

And like most businesses, the organization has struggled financially in tough economic times. Charitable giving is also down, nearly half from $774,450 in gifts and government grants in 2000 to $455,300 in 2007, according to the most recent available Internal Revenue Service records.

The budget of Lodi Health, like most nonprofit facilities, is largely based on the number of patients it serves. Those figures have steadily been decreasing because, simply put, people are not seeking treatment due to lack of insurance and other factors.

In 2009, there were 8,174 admissions. In 2012, there were 6,183. In 2015, the hospital projects even fewer.

Births, surgeries and urgent care patients are also down.

Last year, its total operating revenue was $189 million with salaries and benefits making up about $93 million and expenses totaling $175 million. Five years ago, it was $155 million.

With fewer patients to care for within the hospital, not as many staffers are needed.

“The nursing staff comes in, and they have no patients. So when patients aren’t here to be taken care of, staff go home,” spokeswoman Carol Farron said. “We have no choice with the census down but to tweak positions. We think it’s a better way to go than to flat lay them off.”

Today, Farron is among those who volunteer to take unpaid time off to save the hospital money. Others include nurses and administrative staff.

While she did not have specifics, for most of them the furloughs penciled out to about 20 percent cut in salary, Farron said, adding that when it comes to nursing staff, each floor rotates as to who goes home.

“So if March, for example, is slow, the third floor, for example, would go home. In April it would be the second floor. In May in would be the fourth floor.”

But the reduction in the number of patients is not sudden, figures show.

In the first six months of 2009, Lodi Memorial’s average daily in-patient census was right around 130 patients — its maximum bed capacity at the time. By July 2010 it had dropped to around 110, and in January 2011, just 80.

“As we transition from the world of ‘heads on beds’ to keeping healthy bodies walking out of the hospital, it’s not working (financially),” Farron said theorizing why the census figures dropped.

There is some hope, as May’s average daily census was 91 patients, up from 78 last June. The hospital is licensed for 214 beds.

Bills go unpaid

But things weren’t always so dire for Lodi Health, whose name change went into effect in January to reflect it is more than just a hospital; it is now an integrated health care system.

In a financial report presented by hospital officials 12 years ago, the hospital had more than tripled its income goal of $1.2 million, showing a strong recovery from earlier financial straits. The windfall was to be spent on new technology and hospital improvements, including the new earthquake-safe building to meet state requirements.

Farron said the hospital is recoiling financially from the millions it provided in charity health care in recent years. This is due to a greater number of people without insurance seeking hospital care — often because they could not afford to go to a primary health care provider, according to Farron.

In 2011, the most recent year available, the hospital charged off $43 million in bad debt from patients who could not or refused to pay their bills.

An additional $7.4 million was lost to charity care for those who did not have insurance to pay at least a portion of their bills. Another $6 million in Medi-Cal cases not covered by the government and another $10 million in Medicare costs for elderly patients was not reimbursed.

In the meantime, one study showed that the cost of knee replacement surgery at Lodi Memorial ranks among the highest in the state at $159,571, compared to $126,292 at UC Davis Medical Center and $86,002 at Sutter General Hospital in Sacramento, according to a report last year by the California Public Interest Research Group.

Lodi Memorial charges $31,907 for a Caesarian section, while the same surgery is $17,560 at Sutter.

But hospital staff defended the charges, which showed patients are paying dramatically different base costs for the same surgery depending on where the procedure is performed, by claiming the charges are numbers used by hospitals as a starting point to negotiate with insurance companies.

The numbers published in the report are charges, not actual costs that an insurer or individual actually ends up paying for hospital care or a procedure, and much of it is based on volume, according to Farron.

Comparing the local hospital to Sutter may be unfair since Sutter is a system of hospitals that have lots of volume, and can therefore charge less since they have more leverage in contract negotiations, she said.

When Medicare and private insurance discounts are applied, on average, hospitals end up receiving about 35 percent of what they bill, according to the American Hospital Association.

A recent Time magazine study maintained that hospitals have been rewarding top executives with lavish compensation instead of trying to keep costs low. Some annual salaries, such as six administrators at a New York cancer center, have soared above $1 million.

Because it is not a public agency, Lodi Health does not have to report salaries by name and title. However, a 2007 online tax report, the most recent available, listed total compensation for the top hospital officer at $378,294 including benefits; the second received $247,330.

Farron said the board sets the pay for key executives, and providing competitive salaries is essential to retain the best talent and expertise available.

“Competitive” is defined by what the region’s market offers as salaries for all like positions in the Lodi Health system. To determine what those salaries are, Lodi Health contracts with an independent third party to conduct salary studies of the region, according to Farron.

And, occasionally, on very productive and challenging years, the board offers Harrington and management team members a bonus based on performance, she said.

“The bonuses offered are hardly in line with the overwhelming bonuses mentioned in the Time story.”

At its open house more a half-century ago, Lodi Memorial Hospital represented a dream fulfilled.

But keeping that vision alive into the future will be no simple task.

Contact reporter Jennifer Bonnett at jenniferb@lodinews.com.

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