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Profits At Legacy Health Plummet

August 26, 2019

For a few years, the Affordable Care Act was a financial windfall for Oregon hospitals.

Thousands of newly insured patients and a sharp drop in unpaid medical debt sent profits soaring. Operating margins, which measure an organization's profitability, skyrocketed from historical averages between 3 and 5 percent up to 7 percent in 2015, according to Oregon Health Authority data.

Then the party ended. Uninsured rates stabilized and pent-up demand for medical care faded. As hospitals' operating expenses overtook revenue growth from patients, profit margins fell to 4.6 percent in 2016, 3.9 percent in 2017 and 2.9 percent last year.

The fall has been steep at Legacy Health.

The hospital system with the largest market share in the Portland metro area has grappled with significantly lower profits over the last three fiscal years, its audited financial statements and filings with the health authority show.

Combined margins across Legacy's operating units rose from the 3-to-4-percent range up to 7.3 percent in 2015, and 5 percent in 2016. But then they crashed to 2.9 percent in 2017 and 2.1 in 2018. Legacy operates on an April to March fiscal year.

The nonprofit reported a 2.7 percent margin in its 2019 fiscal year, which ended March 31. Though an improvement over last year, Legacy failed to meet its own 3 percent goal, budget statements show.

The difference in a few percentage points amounts to millions of dollars of revenue. In its banner year of 2015, Legacy recorded more than $120 million in income from its operations. But Legacy reported just 59.3 million in its most recent fiscal year.

Legacy CEO Kathryn Correia brought a new chief financial officer on board late last year, leading what the organization calls "a significant financial sustainability effort" in budget statements.

The company declined requests for an interview.

Searching For Revenue

Legacy faces several headwinds as it tries to chart a more profitable course. Some of those are being felt across the hospital industry.

An aging population and the ACA's Medicaid expansion has hospitals around Oregon treating more Medicare and Medicaid patients. The costs of caring for those patients are greater than the amount hospitals receive from the federal government to cover them.

Legacy incurred more than $1.3 billion in costs for Medicare and Medicaid patients in its 2019 fiscal year, up from $710 million in 2013, its financial filings show. And Legacy was reimbursed for just 70 percent of its costs from the federal government for 2019.

The shift in patient loads wasn't unexpected. And as hospital profits were peaking, large systems began shopping for new revenue streams through expansions and strategic partnerships.

Legacy made a pair of big moves in 2016. The health system took over operations of Silverton Health, including Silverton Hospital east of Salem. It also made a $100 million investment in Springfield insurer PacificSource, acquiring a 50 percent stake in the company and integrating Legacy clinics into its provider network.

The partnership is one of many such alliances made between health care providers and insurers in the years following the Affordable Care Act's implementation, said Jeff Goldsmith, president of Virginia-based Health Futures and national advisor for Navigant Healthcare.

"The problems at Legacy are not unique to Legacy," said Goldsmith, who has studied hospital systems' profitability struggles amid a wave of post-ACA mergers and acquisitions. "The search for revenue growth from sources other than direct patient care has been a consistent theme and a consistent drag on operating earnings for most of the facilities or systems that have done it."

Legacy isn't alone in Oregon, or across the country. Between 2010 and 2015, just four of the 42 new health insurance companies formed through partnerships or acquisitions by health systems managed to turn a profit, according to a Robert Wood Johnson Foundation study published in 2017. The study found the new plans largely failed to penetrate their local markets, with clinics that were often outdated or not well located.

"Few new plans have gained enough enrollees to achieve economies of scale in plan administration, to gain the ability to manage risk or to have an impact on competition and price in their local markets," the report said.

Goldsmith noted that earnings at Washington state-based Providence Health Plan, with its large presence in Oregon, have also suffered following expansions into the Seattle, Tri-Cities and Southern California markets.

"They took a huge hit to their bottom lines in 2016, and only partially recouped it in 2017," Goldsmith said.

Struggles at Legacy Emanuel

Other problems appear related to the flagship of Legacy Health's hospital system.

While profits have been steady at Legacy Good Samaritan Medical Center in Portland, Legacy Mount Hood Medical Center in Gresham and Legacy Meridian Park Medical Center in Tualatin, Legacy Emanuel Medical Center in North Portland has struggled mightily.

Legacy Emanuel reported a negative operating margin of 5.4 percent across all of its units in 2018, as operating expenses outpaced net patient revenues by more than $100 million, financial filings show.

Those figures made it the worst performer among Oregon's largest hospitals. Of the other five largest hospitals in the state by patient volume – OHSU Hospital  and Providence St. Vincent Medical Center in Southwest Portland, Providence Portland Medical Center in Northeast Portland, Salem Hospital in Salem and PeaceHealth Sacred Heart Medical Center at RiverBend – Providence Portland was the only other one with an upside-down operating margin last year, at negative 1.6 percent.

Providence St. Vincent, the largest Oregon hospital in its chain, reported a 4.4 percent operating margin. PeaceHealth's RiverBend hospital was the most profitable of the group, with a 12.9 percent margin, followed by Salem Hospital at 6.6 percent and OHSU Hospital at 4.6 percent.

Legacy Emanuel accounts for more than 40 percent of the net patient revenue throughout Legacy Health's Oregon hospital system, so its steep losses have an outsized effect on the system's bottom line.

Profits at individual hospitals can be affected by a range of factors, Goldsmith said, from the demographics in its area to competition from other clinics. Reductions to Medicaid reimbursements and risk corridor payments have also raised questions about the ACA's future and led to even more volatility in recent years.

Those factors, combined with many hospital systems' aggressive expansions following the ACA's implementation, have had a strange effect: An increasing number of large hospital systems report steep income losses, despite operating in some of the country's brightest economic hotspots.

"This is a national phenomenon we're talking about here. All over the country, one of the most interesting things was that some of the worst downturns were in the fastest growing parts of the country, like at Baylor, Scott & White in Dallas and Memorial Methodist in Houston," Goldsmith said. "The Pacific Northwest is doing really well financially, not unlike Texas."

You can reach Elon Glucklich at [email protected].