Low-Key Salem Health Becomes Financial Powerhouse

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Salem Health’s latest expansion sounds ambitious: building a $235 million, seven-story, 150-bed tower at its centerpiece facility, Salem Hospital.

A decade or two ago, such a project would have seemed gargantuan for the nonprofit Salem-based health system formally named Salem Health Hospitals & Clinics.

But these days, Salem Health has become a financial juggernaut that can handily carry that project – as well as other expansions recently executed or in the works.

Consider: In the past three years alone, Salem Health has reaped $300 million in profits from Salem Hospital, an expanding network of clinics and a small hospital in Polk County, the system’s financial filings show. In the past seven years, its cumulative profits total just over half a billion dollars.

The profits -- and a surging stock market -- have helped swell Salem Health’s investment portfolio of stocks and bonds to nearly three-quarters of a billion dollars by the latest tally.

The system can readily handle the debt burden of the new addition, bond analysts concluded last fall.

To reach this position of strength, Salem Health has followed a simple strategy. Guided by its board of Salem-area leaders and business executives, it hasn’t pursued distant mergers or elaborate regional expansions. Instead, it has focused on dominating its Marion and Polk county markets as thoroughly as possible.

In contrast to some other major Oregon metro areas, where rival hospital systems compete, Salem Health owns the only hospitals in Marion and Polk, giving it a commanding hold on a market with a population topping 435,000 people.

Salem Mayor Chuck Bennett said he doesn’t see a downside to the region having a single dominant health system – provided it is a nonprofit and is governed by a board of local residents, as Salem Health is.

“The result is we have a well-financed, well run hospital that is able to do a lot of things, like add a 150-bed tower,” Bennett said. “It is a resounding success for us. We’ve been very lucky.”

Marion and Polk are a goldmine in part because of strong population growth and high wealth and income levels, Fitch bond ratings analysts noted in a report last fall.

Salem Health has “strong profitability and cash flow generation,” and holds a “leading market position in a strong service area exhibiting population growth and good demand for acute care services,” the analysts wrote.

Like many other Oregon hospital systems, Salem Health’s financial muscle stems in part from the state’s expansion of Medicaid insurance to more low-income residents. Hospital systems now spend less on charity care and have less bad debt, giving them more money to spend on operations or squirrel away as profits

But despite the plaudits from financial analysts and civic leaders, Salem Health has yet to break into the top ranks of Oregon medical providers. Hospital Compare, Medicare's ranking system, gives Salem Hospital an overall rating of three out of five stars. 

Some other regional hospitals are ranked higher. Among them, Good Samaritan Medical Center in Corvallis, St. Charles Medical Center in Bend, Legacy Silverton Medical Center in Silverton, Providence Medford Medical Center in Medford and Saint Alphonsus Medical Center in Ontario have four stars. Asante Rogue Regional Medical Center in Medford and Asante Three Rivers Medical Center in Grants Pass are top rated with five stars along with Oregon Health & Science University.On more specific issues such as timely and effective care, complications and deaths and psychiatric care, Salem Hospital’s ratings are largely in line with national and state norms. Patients overall give the hospital four out of five stars.

The latest state numbers on the hospital’s prices, in comparison with other facilities, show that in 2016 the hospital was at or often below state averages for the cost of procedures. 

Many Expansion Moves

The new 150-bed tower that officials broke ground on this month is just one of Salem Health’s expansion strategies.

Most recently, Salem Health bought for an undisclosed sum the six-clinic Salem-based WVP Medical Group, a physician-owned primary-care business that serves patients across the mid-Willamette Valley. The purchase beefs up Salem Health’s existing network of nine primary and urgent care clinics across its two-county territory. The deal epitomizes a nationwide trend of physician groups joining larger systems.

Salem Health has also formed  partnerships with Salem-area specialty medical providers, with Salem Health taking the controlling ownership stake. A new partnership headed by Salem Health plans to open an ambulatory surgery center in Salem later this year, the company said Salem in its bond prospectus. Its partners include Salem Clinic, with Salem Health holding a 51 percent share.

Meanwhile, Willamette Surgery Center -- which is 54 percent owned by Salem Health -- will build a new Salem facility, to open in late 2021, according to the bond filing.

Deals such as the WVP purchase give Salem Health increased power to negotiate with insurance companies, experts said.  The system-owned primary care clinics also function as “feeders” that refer patients to the hospital or other arms of the system.

Salem Health says the new tower is aimed at helping area residents. “We know the population in our area is growing and a large part of that growth consists of those over age 65 – a demographic that frequently utilize our services. We are building to accommodate the need for more beds this growth will demand,” Salem Health spokesman Elijah Penner said.

In the health care sector, “often the key driver to a merger is financial. Our stability means we are not required to look for a rich partner,” he added.

Public Dispute With Regence

But Salem Health’s long and impressive growth spurt has featured some stumbles.

In an unusual episode last year, insurer Regence BlueCross BlueShield of Oregon, with 23,000 members in the Salem area, lambasted Salem Health in a full-page newspaper ad claiming, “Salem Health is asking for a bigger raise than you can afford” and saying the health care provider should “put patients first, not profits.”

Regence and Salem Health were in the midst of negotiating rates Salem Health would charge for services to Regence members, and Regence said Salem Health was trying to impose double-digit price increases.

Salem Health dismissed the ad as a “PR stunt” that was “designed to divide a community” and said price increases were warranted to bring Regence up to market rates.

The sides eventually settled the dispute in private.

Another recent Salem Health misadventure was also insurance-related: its involvement in managing Medicaid – health insurance for low-income residents. In 2012, Salem Health teamed up with nine other health entities to set up a for-profit Marion/Polk coordinated care organization – Willamette Valley Community Health – to receive state funding to insure Oregon Health Plan members in Marion and Polk counties. Salem Health held an 18 percent share in the business. But in early 2019, a majority of the entity’s partners voted to shut it down, for undisclosed reasons. Then, Salem Health, Salem Clinic and WVP quickly formed a new entity to bid for the state’s Marion/Polk Medicaid contract starting Jan. 1, 2020. But the state rejected that application, saying the new entity had no track record and was inadequately funded. Instead, the state awarded the Marion/Polk Medicaid contract, serving 100,000 residents and worth about $500 million a year, to Springfield-based insurance powerhouse PacificSource. The move so angered the Salem Health/Salem Clinic/WVP group that it considered taking legal action against the state, but never did.

Asked whether it planned to get into the health care insurance business, Salem Health responded that it had no plans to “start an insurance company.” But other hospital systems are betting that’s the way to go. Last year, the Portland-based nonprofit hospital system Legacy Health merged with insurer PacificSource. Also last year, the Washington-based nonprofit Providence hospital chain acquired the Portland-based Medicaid and Medicare insurer CareOregon, supplementing Providence’s existing health insurance business. These entities figure they can become more efficient – and have more control of their markets – by carrying out vertical integrations.

Hospital Enjoys Monopoly

Salem Health’s dominance in its home market is in part a quirk of history. Until 1969, Salem had two competing hospitals: Salem General Hospital and Salem Memorial Hospital. They merged that year. And ever since, Marion County has had only a single hospital. In 2002, Salem Health bought the tiny West Valley Hospital in adjacent Polk County, now with a population of about 85,000. It is Polk’s only hospital.  

Salem Health holds about 80 percent of the Marion/Polk market, with minor competition from Legacy Silverton Medical Center and Oregon Health & Science University Hospital, which between them have only about 12 percent of the market, according to Salem Health’s bond prospectus.

Compare the Marion/Polk market with the much more fragmented and competitive Lane County market, with a population of about 400,000. There, market leader PeaceHealth operates four hospitals: the new and highly profitable RiverBend in Springfield; the old and money-losing University District hospital in Eugene; the money-losing Cottage Grove hospital, and the marginally profitable Florence hospital. In the core, lucrative Eugene-Springfield market, PeaceHealth faces incessant competition from aggressive and growing for-profit McKenzie-Willamette Medical Center.

Unlike many Oregon nonprofit hospital systems, including PeaceHealth, Salem Health hasn’t inherited small, money-losing rural hospitals that it props up financially. Salem Health’s West Valley Hospital, with just six beds, is in fact highly profitable, courtesy in part to being just a 20-minute drive west of booming Salem. In the past 13 years, the small hospital lost money in just two years: 2007 and 2008 at the onset of the Great Recession. In 2015-2018 it posted double-digit profit margins every year, according to its financial filings with the state. Its 2018 revenues were more than double its 2006 revenues.

Salem Hospital Reaps High Profits 

Many Oregon hospital systems have seen their revenues swell in the past decade with the state’s ongoing economic and population growth. But Salem Health’s finances stand out even against that backdrop. Salem Hospital, a sprawling 448-bed facility just south of the state Capitol, is the system’s pillar. In 2006, it reported a profit of $33 million on revenues of $370 million, for a profit margin of 8.9 percent.

After a little more than 10 years of rapid expansion, in 2018, the profit hit $103 million on revenues of $825 million, for a profit margin of 12.5 percent.

The hospital accounts for about 90 percent of Salem Health’s overall revenues.

Salem Health stresses that it pumps much of the profit back into facilities and services. “Annually, we spend around $50 million on equipment, beds and buildings,” spokesman Penner said.

Bond analysts lauded these numbers and praised management’s so-called “Lean” program, which seeks “continuous improvement, elimination of waste and variation, and respect for people,” according to Salem Health. From 2006 to 2016, the company  reported rising profit margins, mostly in the high single digits. But in 2017-19, the Lean system and other management measures paid big dividends, the analysts said, producing consistent double-digit profit margins. Most Oregon hospitals are happy to squeeze out profit margins in the mid-single digits.

The “Lean” program and population growth aren’t the sole factors at play.

Like other hospital systems, Salem Health has been financially helped by Oregon’s expansion of Medicaid coverage to a larger pool of state residents. That’s sharply cut the number of patients who are uninsured or fail to pay their hospital bills. Even as its revenues have leapt year to year, Salem Hospital has spent ever less on charity care and written off ever less bad debt. Charity care and bad debt dropped from $83 million in 2011 to $58 million in 2018, in effect helping to boost Salem Health’s profits. Salem Health argues, however, that to serve the expanded Medicaid population, the system had to hire more staff, and that Medicaid payments don’t cover actual costs.

Another characteristic of Salem Health: It apparently is untouched by the wave of unionization sweeping across numerous Oregon hospital systems. Nurses, technical workers and even some doctors have voted in unions at Pacific Northwest hospital systems in recent years. Providence, PeaceHealth, McKenzie-Willamette, Kaiser, Samaritan are unionized and face regular labor contract disputes. The workers generally seek more pay, better benefits, more job security and increased staffing to improve patient care. The high cost of homes in the Bend area helped push tech workers at Bend’s St. Charles Medical Center to unionize last fall.

But Oregon union officials say they know of no recent attempts by workers at Salem Health to unionize.

Meanwhile, the occupancy rates at the hospital have consistently topped 80 percent, the bond report said.

Marion County has a large and growing, elderly population. Nearly 16 percent of county residents are aged 65 and up, according to the U.S. Census, an increase from 13 percent in 2010. That’s good for hospital business, because elderly people are “typically heavy users” of hospitals, Fitch analysts noted.

The Salem area’s population over the age of 60 is forecast to increase about 50 percent in the next 15 years, said Erik Andersson, president of Strategic Economic Development Corp., the region’s economic development agency. “It is staggering to think of the projected growth in demand for hospital services,” he said. “We are thankful that Salem Health is investing in the future of the community.”

You can reach Christian Wihtol at [email protected].

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