Charity and Hospitals

The Med is hurting, but Baptist and Methodist are fine.

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Headlines can mislead us. The financial crisis that could close the emergency room at the Med is a special case. Nonprofit hospitals in Memphis make a lot of money, they're expanding out of Memphis, and their balance sheets are flush with cash.

The two giants are Baptist Memorial Health Care Corporation, with 32 percent of the Memphis market and rising, and Methodist Le Bonheur Healthcare, with 37 percent of the Memphis market. St. Jude Children's Research Hospital specializes in childhood cancer and has a small share of the market.

In a report in October affirming Baptist's "AA" bond rating, Standard & Poor's noted that Baptist "has identified more than $933 million of fixed income and equity assets," commonly known as stocks and bonds. In the 11 months ending in August, Baptist's revenues exceeded expenses by $88 million, up from $36 million in 2006, when it was in a slump. This year's results and 5 percent operating margin have far exceeded the hospital's own forecast of an operating margin of less than 1 percent.

Methodist isn't doing quite as well but has a very strong balance sheet and an "A" credit rating. According to its third-quarter financial statement, Methodist has $711 million in cash, an increase of $88 million this year. Patient service revenue increased by $23 million, or 2.6 percent over the same period last year. Methodist's operating margin is 4.5 percent, with operating income of $56 million for the first nine months of 2009.

The term "nonprofit" as opposed to "for-profit" hospital systems such as Tenet Healthcare, which has 14 percent of the Memphis market, does not mean Baptist and Methodist don't make a lot of money. They do, even during a recession and a national "health-care crisis." They don't pay taxes, because they each provided more than $275 million of charity care last year, by their own accounting.

So did the Med. And if the Med cuts back or closes, that charity care will have to go somewhere else. And there's the rub. Charity care is crucial for mission statements and tax exemptions but bad for balance sheets and credit ratings. The founders' vision is the financier's risk.

Baptist hospital was founded in 1912 by churchmen in Tennessee, Arkansas, and Mississippi "to render quality health care to all in this area in keeping with the tenets of our church." Methodist's mission is "supporting and extending the health and welfare ministries of the Memphis, Arkansas, and Mississippi annual conferences of the United Methodist Church."

For nearly a century, a Baptist hospital of some sort was a Medical Center landmark, until its 20-story building between Union and Madison was closed in 2000 and demolished in 2005. Baptist now has 14 hospitals and one rehabilitation facility but nothing in the Medical Center. Its growth has been in the suburbs and the tri-state region. Its board of directors includes only one Memphian: president and chief executive officer Stephen Reynolds.

This is how the audit and financial reports describe indigent care: "Hospitals may be susceptible to economic and political changes that could increase the number of indigents or the hospitals' responsibility for caring for this population." And this: "The indigent care communities could constitute a material and adverse risk in the future."

From this perspective, Methodist could be more "at risk" than Baptist, because its hospitals are closer to indigent populations. In addition to expanding its Germantown hospital, it is replacing Le Bonheur on Dunlap. If the Med closes, Methodist could see its market share increase but its revenues decrease as doctors and paying patients migrate eastward and non-paying patients go to Le Bonheur or Methodist University hospital on Union Avenue.

The Med has a proud 180-year history and a lousy balance sheet. In 1981, it was incorporated as the Regional Medical Center for indigent care for a six-state area. In partnership with the University of Tennessee medical school, it has trained more than half the physicians practicing in Tennessee.

But it loses money. The Med lost $33 million from operations in 2005, $38 million in 2006, $39 million in 2007, and $40 million in 2008. The loss was partially offset by a contribution from Shelby County government of $25 million to $31 million a year.

Hospitals are desirable talent magnets for cities, part of the "eds and meds" equation. The issue is who's going to take the hit for indigent care?

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