Operating in the red: Providence Sacred Heart has been losing money since 2016

Providence Sacred Heart Medical Center has lost $107 million in the past 3 1/2 years as it struggles to balance rising costs of care with varying reimbursement rates from public and private insurers.

Hospital officials acknowledge the losses are significant but remain confident the hospital’s balance sheet will rebound.

Shelby Stokoe, chief financial officer of Providence in the Spokane region, said it’s a case of “expenses growing faster than revenue.”

“It has been a declining trend. It is not uncommon in the industry, if you look at other hospitals, they are seeing the same thing,” Stokoe said. “One of the things that we feel fortunate about is being a part of a larger health system because this is normal in the industry to have expenses growing faster than revenues.”

Sacred Heart Medical Center is the second-largest hospital in Washington state, with 691 licensed beds. It is the major trauma center for the Inland Northwest and draws patients from across the region, playing a crucial role in health care on the eastern side of the state.

The hospital lost $50 million in 2018, more than any of the other 10 largest hospitals in the state that year, an analysis of hospital financial reports from the Washington State Department of Health shows. So far in 2019, Sacred Heart remains in the red, and Providence officials said they are working to reduce costs internally while maintaining quality of care, by helping people access medical care outside the emergency room and working to shorten the length of hospital stays.

“In addition to our local efforts, Providence St. Joseph Health is taking steps to reduce the cost of administrative overhead. As a result of our efforts, our 2019 performance reflects an improvement over 2018, and we expect that trend to continue,” Providence officials said in response to questions about its financial reports.

Hospitals employ nearly 10,000 people – including 4,000 at Sacred Heart – in the Spokane area, part of a health care industry that is the region’s top employment sector accounting for 18.5% of all people employed, Spokane Trends data show.

“If Sacred Heart continues to lose money, and they keep paying their staff the amount they are, or more, then they will have to exit some lines of business and look at what’s the least profitable,” said Patrick Jones, executive director of the Institute for Public Policy & Economic Analysis at EWU.

Sacred Heart is not alone. All Spokane-area hospitals, with the exception of MultiCare Valley Hospital, are operating at a loss so far in 2019. MultiCare Deaconess Hospital has lost money each year since 2014. Providence Holy Family, like Sacred Heart, has lost money since 2016, more than $27 million in the last 3 1/2 years.

Last year was difficult for hospitals statewide. About a third have negative operating margins, DOH data shows. Of the largest hospitals in the state in several different regions, Sacred Heart lost the most money in 2018. Swedish Medical Center First Hill, the largest hospital in the state and also owned by Providence, lost more than $27 million last year.

Hospitals’ troubles in recent years are due in part to how the system of care has changed since the Affordable Care Act was passed.

When Washington state expanded Medicaid, it opened up health insurance and access for about 600,000 more Washingtonians, shaking up the mix of who was paying for costs of care at hospitals.

“That was a great thing: People had health care coverage, many for the first time. But what we’ve seen for hospital financing is… an influx of people needing services and hospitals trying to serve them and a reimbursement model that doesn’t pay the cost of care or keep up with inflation,” said Chelene Whiteaker, senior vice president of government affairs at the Washington State Hospital Association.

Medicare and Medicaid make up the majority of most hospitals’ total payer mix, Whiteaker said. Commercial insurance usually makes up about a third of a hospital’s revenues but reimburses at much higher rates, meaning commercial insurance can help offset lower reimbursement rates of both Medicare and Medicaid plans. Yet some hospitals, including those in Spokane, serve a greater share of Medicaid patients.

Sacred Heart’s patient mix is 43% Medicare, 24% Medicaid, 25% commercial and 8% self-pay or other, according to a payer-mix report provided by the hospital. All Spokane-area hospitals received more than 21% of their patient revenue from Medicaid in 2018.

This trend fits the picture of Spokane’s economy. Spokane County has a lower median household income than both the state and the country. In 2018, the median household income in Spokane County was $59,783, while the state median was $74,073.

Jones said what could be driving the hospital’s financial trends to some degree are the situations faced by the region’s lowest-income earners. Even if median salary figures go up, Jones said, if the lower part of the income spectrum does not earn more at a faster rate, the same problems exist.

“We’ve got to see that lower part of the income spectrum do better, and that’s a big ask or challenge,” Jones said.

Compared with some Seattle-based hospitals, such as Swedish Medical Center, Sacred Heart serves many more Medicaid patients. Fewer than 16% of Swedish Medical Center’s First Hill revenues in 2018 were from Medicaid, while Sacred Heart had more than 24% of revenue that year from Medicaid.

Beyond inflation and reimbursement rates as well as drug prices or medical expenses, hospitals contend statewide nursing shortages affect hospital financial outcomes, too.

“Our state is facing a nursing shortage,” Whiteaker said. “You have hospitals competing statewide and nationally over nurses.”

Some nurses are in the midst of contract negotiations at a handful of Providence-affiliated hospitals across the state. Nurses at Sacred Heart have negotiated for months with Providence leaders to keep their paid- and sick-leave benefits, which the hospital wants to change. Sacred Heart nurses have authorized a strike vote but are still trying to negotiate to avoid one.

Throughout negotiations, nurses have pointed to Providence’s billion-dollar revenues in their arguments against the proposed changes to benefits. In 2018, Providence St. Joseph Health reported $24.4 billion in operating revenues. From those revenues, Providence earned $165 million in income.

“In essence, operations broke even,” Providence officials wrote in a statement.

At Sacred Heart in 2018, more than $280 million was spent on what are listed on financial reports as other direct expenses. Stokoe said that money is spent on such things as what Providence calls “shared services,” which is essentially the centralized, corporate function of Providence. Some shared services include things like payroll services as well as some employee benefits, but Providence declined to provide details of the cost of those shared services.

“We did not break it out because definitions vary greatly, and it would be nearly impossible to provide a line-item detail with enough definitions to fully explain what is in each category,” Stokoe said in a statement provided to The Spokesman-Review.

Hospitals have to evaluate their bottom lines regardless of whether they are a nonprofit or not. That process began in Stevens County last summer when Providence closed the long-term care unit at St. Joseph’s Hospital in Chewelah. Leaders cited low numbers and challenges recruiting the workforce necessary to run the unit. Hospital financial data shows that the critical access hospital has lost money since 2014.

Several Providence hospitals are looking at further losses this year, but so far, the numbers do not appear as severe as last year. Sacred Heart is thus far operating at about a $21 million loss through the third quarter in 2019, while Holy Family Hospital is operating at about a $2 million loss.

“The strength of our health system is really what helps us kind of weather the storm and not make drastic changes,” Stokoe said.

The broader question of how to solve or plan for the rising costs of health care or reimbursement structures is still far from being answered.

“The trend line on hospital finances is concerning here,” Whiteaker said. “We’ve seen a downward trend. There are adjustments made, and there are difficult decisions made for how you are delivering care and if there are any reductions to be made. Those are real decisions that hospital leaders are confronted with when you look at finances that won’t make sense for a long-term basis.”