Dennis W. Chalke,
Senior Vice President,
Chief Financial Officer &
Treasurer of Baystate Health
Baystate Health finished FY2019 with an operating margin of 2.5% before other non-recurring expenses (2.3% after) on revenues of almost $2.4B. While revenues increased .4% from the prior year, the operating margin reflected an 11% increase. Approximately 70% of revenues are generated from Baystate Health providers which include the four acute care hospitals and the employed physician group of over 700 providers. These revenues grew more than 6.5% from the prior year as patient demand for services continues to increase. Baystate Medical Center continues to see growing volumes and remains the dominant organization within Baystate Health with almost $1.4B in operating revenues. However, our managed care health insurance company, Health New England, experienced a significant drop in enrollment during FY2019 as a result of changes in the Massachusetts Medicaid program. This combined with other factors resulted in reductions of $94M in premiums and $89M in related expenses.
Like most healthcare organizations, the majority of Baystate’s revenues come from the Medicare and Medicaid programs. While the percent of each varies from entity to entity typically, the total is approximately 65%. Both programs have had very minor increases in provider payment rates over the past several years and in some years they have been flat or negative. This creates significant challenges for providers experiencing expense inflation of three to four percent. Baystate has been dealing with this challenging issue for several years by developing financial improvement initiatives approaching $200M in cumulative revenue enhancements or expense reductions. The improvements span over a large range of initiatives including supply chain pricing improvements, growth in our pharmacy program, many enhancements to improve our revenue cycle, and ongoing benchmarking to ensure we are efficient in the delivery of services.
Baystate Health was reviewed by both S&P and Fitch rating agencies during the year and had its rating of A+ with a stable outlook affirmed by both agencies. The S&P rating in September reflected the impact of an anticipated borrowing of $166M of debt including $125M of new money and $41M for refinancing existing debt. The new money will be used at Baystate Medical Center to continue building out existing space including the construction and replacement of 18 new operating rooms and six cardiac procedure rooms, additional beds, and expanded parking.
Healthcare organizations across the nation continue to experience a very challenging financial environment. Fitch ratings maintained its negative outlook on the not-for-profit healthcare industry during 2019 citing increased competition from non-traditional competitors entering the market and the ongoing transition to population health and risk contracts which have shifted some of the insurance risks onto providers. Risk contracts either reward or penalize physicians and hospitals based on their ability to provide efficient, high quality, patient-centered care. To be successful, healthcare systems need to make significant investments in IT, analytics, and staffing such as care managers. These investments, coupled with the annual growth in salaries, and supply and pharmacy costs, have resulted in expense inflation exceeding revenue inflation for the past several years. Hospital systems across Massachusetts had a median operating margin of 0.0% in FY2018 with little or no improvement expected in FY2019. Since the operating margin funds the majority of each healthcare system’s capital budget, this performance is not sustainable over the long term.
In addition, Massachusetts hospitals continue to be challenged by the growth and underfunding of the Medicaid program. This program now includes approximately 1.9 million residents or 28 percent of the population and payments from the Commonwealth are more than 20 percent below the actual cost of hospital services. The Commonwealth has developed an Accountable Care Organization strategy putting providers at risk for the cost of care to treat the population.
While experiencing major challenges, Baystate Health is well positioned for the future. We continue to provide high quality, efficient care, and are investing in resources required to be successful given the challenges of healthcare reform and population health. Baystate Health is committed to continuous improvement in the areas of employee engagement, clinical quality outcomes, patient satisfaction, and cost reduction, and we expect continued advancements in these areas.
Our independent public accountants, Deloitte & Touche LLP, have completed an audit of Baystate Health’s financial statements for the fiscal year ended 2019 and issued an unqualified opinion.