Hopkins hospital seeks 7% rate rise

Profit margin dips

state told 7% more to be needed in 2002

October 10, 2001|By M. William Salganik | M. William Salganik,SUN STAFF

Johns Hopkins Hospital has told state regulators that it needs a 7 percent rate increase this year and another 7 percent next year - over and above regular inflation adjustments - to improve its profit margin and shore up its credit rating.

As state regulators have held rates down, the hospital's profit margin has slipped from 3 percent four years ago to 1.9 percent in the fiscal year that ended in June. In its filing, Hopkins did not say that it is facing layoffs or service cutbacks, but said it needs a higher margin to issue hundreds of millions of dollars in bonds over the next seven years to finance construction of a critical care tower and new children's center.

"Relative to our capital requirements, our generation of cash pales in comparison to what we really need," Ronald R. Peterson, president and chief executive officer of Johns Hopkins Health System said in an interview.

Because of Hopkins' size and prominence, its rate request has potential to reverberate through other hospitals in the state. The review process is expected to take a few months. The regulators have asked Hopkins for more data, and haven't yet indicated whether they agree with any of the points Hopkins is making. They did grant Hopkins two temporary rate increases, the most recent last week, totaling 3.5 percent, indicating they believe any permanent rate adjustment will be at least that much.

Under the current rate-setting formulas used by the Health Services Cost Review Commission, any extra increase a hospital gets is deducted from the across-the-board inflation adjustment given to all hospitals the following year. While Hopkins is only one of 50 hospitals, it represents about one-eighth of the patients and revenue in the state.

If the full requested increases were granted, the action would trim a percentage point off the inflation-based rate increases of all hospitals for two years in a row, according to rough estimates by Stuart A. Erdman, Hopkins' senior director of finance. For example, if the commission decided to grant a 4 percent inflation adjustment next year, the hospitals' increase would be cut to 3 percent

To avoid penalizing the state's community hospitals, Hopkins is asking the commission to change its formulas and treat it - along with University of Maryland Medical Center, the other hospital in the state tied to a medical school - separately from the rest. "Where we'd ultimately end up is to treat it as two pools - the academic medical centers and the others - so the community hospitals wouldn't fear we're stealing from their pool," Peterson said.

Even if the commission were to change its formulas, it has to worry about a deal under which Medicare pays state-set rates in Maryland, rather than the rates it pays in the other 49 states. To retain the so-called "Medicare waiver," the commission needs to keep Maryland costs growing more slowly than rates nationally.

"Although I haven't seen Hopkins' application, since Medicare patients go to Hopkins, it would appear that any increase would impact the waiver," said Barry Rosen, a health care attorney with Gordon, Feinblatt who appears frequently before the rate commission. "The commission should be concerned about taking any action that jeopardizes the waiver."

Hopkins is also asking the regulators to compare Hopkins to national peers such as Yale-New Haven Hospital, UCLA Medical Center and Massachusetts General Hospital, rather than to other hospitals in Maryland.

The commission's formulas are supposed to adjust for factors such as complexity - a heart transplant is more expensive than a tonsillectomy - labor costs, care for the uninsured and the costs of training medical residents. Hopkins, however, believes these formulas do not account adequately for its actual costs.

In addition, Peterson noted capital needs over the next seven years. The current children's center, which is almost 40 years old, and various intensive care units are outmoded, Peterson said. He said some of the money for the construction would come from contributions, but Hopkins would need to use bond financing as well.

In issuing a rating of AA- to Hopkins in August, one rating agency, Fitch, warned "the issuance of additional debt may place downward pressure on the rating." M. Craig Kornett, a senior director at Fitch, said yesterday that he viewed Hopkins' position as "very strong." The median Fitch rating for hospitals is A-, three grades below that given to Hopkins.

One rating agency, Moody's Investors Services, downgraded Hopkins one notch in July, from Aa3 to A1.

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