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Schnurman: Recession bearing down on Texas Health Resources
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Mitchell Schnurman
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The healthcare industry is supposed to be resistant to recession, because ill people can’t put off going to the hospital. But this kind of economic downturn still stings in a big way.
Consider Texas Health Resources, the top hospital provider in the region. From 2004 to 2008, the Arlington nonprofit system earned almost $1 billion in "excess revenue" — what regular companies would call net profit.
Then the recession hit last year, and THR, with 13 local hospitals, lost nearly $428 million.
That jaw-dropping turnaround is the first loss since the system was formed in 1997 by the merger of Harris Methodist in Tarrant County and Presbyterian Healthcare in Dallas.
Most of the red ink stems from declining investments, with more than half being paper losses only. THR didn’t sell most of the assets, and if the stock market bounces back, their value will recover.
Some "things are not directly in our control, and we have to manage around them," said Barclay Berdan, a senior executive vice president who oversees about half the THR hospitals, including those in Tarrant County.
To Berdan, the financial number that matters most is operating income, and that’s still solidly in the black. It topped $96 million in 2008, but that’s a 43 percent drop from the year before, and it’s less than half the operating profit in 2004 and 2005.
In response, the health system cut capital spending last year by nearly $35 million, or 15 percent. It put other capital projects on hold, waiting for the economy to strengthen. It tried to squeeze more efficiency from the supply chain and laid off fewer than 100 employees across the chain, hoping to trim expenses without compromising patient care.
For most companies, the recession creates a revenue problem. General Motors, Pier 1 Imports, McClatchy Co. and many others have seen sales fall by 20 percent and more. Their natural response was to cut costs deeply, including major layoffs and reductions in pay and benefits.
That’s not an option for THR, because patient demand keeps growing, with revenue rising 10 percent last year. Regardless of the economy, people get sick, and the difference today is that more can’t pay the bills.
THR’s write-offs for bad debts increased $31 million last year after rising almost $30 million the year before.
"We see more people coming to us who don’t have insurance and don’t have the ability to pay for their care," said Berdan, who also chairs the Texas Hospital Association trade group.
Many have high-deductible, high co-pay plans, and if they get extensive care, they can’t pay their share, either.
Hospitals nationwide are getting squeezed in a similar way, and they’re optimistic that reform in Washington will fix the problem with the uninsured. Margins at hospitals overall had climbed steadily since 2001 and then dropped off the table in the fourth quarter of 2008, declining to negative 8 percent.
Two traditional sources that could have offset THR’s bad debts also got waylaid by the recession. Investment income used for operations swung from $33 million to a $2.6 million loss. A $15 million drop came from lower equity earnings of THR affiliates, reflecting the downturn at its partner hospitals.
Combine the hits from bad debts, investment income and earnings from affiliates, and that more than accounts for the decline in operating income in 2008.
First-quarter results for 2009 were much the same, with investments falling and bad debts on the rise. Operating income was $38 million for the three months ended in March, a drop of 19 percent — still down, but trending better than 2008.
THR has been managed conservatively, and it’s built up a large nest egg to withstand economic cycles. The plan is working, but Moody’s Investors Service is worried about the system’s billion-dollar debt. Last month, Moody’s revised THR’s outlook to negative from stable, citing "the downturn in financial performance and liquidity in 2008" and the larger declines from 2004 and 2005.
"We believe that stronger performance is warranted" given the debt load, Moody’s wrote.
THR bonds remain highly rated, and another rating agency, Standard & Poor’s, last month affirmed the system’s strong ratings and outlook.
THR’s flagship hospital in downtown Fort Worth took a hit last year after one of the largest ob-gyn practices in Tarrant County moved to a new women’s facility at Baylor All Saints Medical Center.
In 2007, 7,024 babies were delivered at Texas Health Harris Methodist Fort Worth. Last year, the total dropped to 3,851, and deliveries are running at a lower pace this year.
"The chassis really wasn’t built for that many deliveries," Berdan said about the 2007 total. "We aren’t trying to get back to that kind of volume."
The hospital recruited several ob-gyn specialists last summer, and it continues to expand its network of physicians. In Texas, doctors are allowed to work for hospitals only if they’re employed through a separate entity.
Berdan said that the Texas Health Physicians Group has 250 to 300 doctors and that medical students and specialists are showing more interest in joining larger organizations. In the past, more wanted to run their own practices.
"That’s a reflection of the economy and the impact on small businesses," Berdan said. "And it represents a real heightened level of insecurity about where health reform might go."
Having more doctors on staff doesn’t guarantee better healthcare at a lower price. But Berdan believes that it will lead to better integration of all the players and that the team approach could be a game changer.
"It makes sense to me. It’s intuitive," he said. "I’ve seen it begin to happen."
It’s one of the more promising developments to come out of a tough time.
