MICHIGAN

March 31, 2013

Michigan Hospital Systems Expand With Mergers and Acquisitions and Partnership Strategies;

Profitability Grows but Inpatient Utilization Declines

Battling for market share, Michigan hospital systems are pursuing multiple strategies to gain and maintain market share at a time when inpatient utilization is flat or declining. These conclusions and other finding are in Part Two of Michigan Health Market 2012, which is released this week. The new report analyzes hospital profitability and utilization using 2011 data and updates enrollment information and financial results for Michigan health plans through June 2012.

Michigan hospitals improved their already strong profitability in 2011 and are continuing their consolidation into integrated regional systems. Responding to the rejuvenation of the Vanguard/Detroit Medical Center system, the William Beaumont and Henry Ford systems have announced plans to merge and are completing their due diligence. The combined system would have between 38% and 41% of the hospital market in the Detroit area.

 In the past decade, organized systems of care have become increasingly important in regions outside of southeast Michigan. Religious systems, such as Trinity Health, and others, like McLaren (based in Flint) and Spectrum (Grand Rapids) have acquired hospitals, expanding their geographic reach and increasing their negotiating power with health insurers. And eight Michigan systems and partnering physician groups have formed Accountable Care Organizations (ACOs) for contracting with Medicare and other payers. The report finds:

Detroit area hospitals reported higher net income in 2011. Based on an analysis of data from Medicare cost reports for 2011 fiscal years, hospitals in this area had net income of $398.8 million, or 3.7% of net patient revenues of $10.9 billion. That compares to net income of $357 million for these hospitals in 2010. Except for the Beaumont hospitals, they lost money on operations, but had $550 million in other revenues from investments, philanthropy and government grants. The Vanguard/DMC hospitals had net income of $117.2 million (7.2% of revenues and more than twice as much as in 2010), followed by the St. John-Providence hospitals, with net income of $90.5 million, or 5.2% of revenues.

Net income increased for major hospitals in other parts of the state. 34 hospitals had net income of $930.2 million, or 7.8% of net patient revenues, compared to net income of $673.3 million in 2010. The University of Michigan and Trinity hospitals were the most profitable in 2011.

 Inpatient hospital days at Detroit area hospitals have decreased by almost 100,000 (about 5%) in the past four years. Though unemployment here has decreased, fewer people have comprehensive benefits and they may be deferring care because of financial concerns. Even as inpatient utilization has declined, hospital system are making large investments in new facilities and adding capacity.

 Enrollment in Michigan HMOs declined in the first half of 2012, with HMOs losing about 47,000 members while Medicare plans reported moderate growth. Enrollment in Medicaid HMO plans (and Medicaid generally) has not grown in the past 18 months. The state Legislature will decide whether or not to expand eligibility under the Affordable Care Act, which could add as much as 400,000 new enrollees between 2014 and 2020. Either way, Medicaid is still seen as a strong opportunity and consolidation of health plans continues. In 2012 and 2013, McLaren Health Plan and Health Alliance Plan are absorbing CareSource and Midwest Health Plan, two Medicaid HMOs respectively.

 Profit margins for Michigan HMOs averaged 2.3% for the first half of 2012.  Blue Care Network had the strongest net income.

Part One of Michigan Health Market Review 2013 will be released in late June. The 2013 report will be the 17th annual edition of our Michigan market analysis, which was first published in 1997.

Michigan Health Market Review 2012 Finds:

 Health Plan Companies Enjoy Strong Profitability and Prospects for Growth;

New Wave of Consolidations Changes Market Dynamic

 (Detroit/Ann Arbor) HMOs in Michigan posted their highest net income ever in 2011, added members and have strong prospects for growth in all major lines of business.

These findings and others are reported in Part One of Michigan Health Market Review 2012, released here today. This is the 16th annual Michigan market study published by Allan Baumgarten, an independent analyst and consultant based in Minnesota. In the Part Two report, to be released later this year, he will analyze hospital profitability and utilization for 2011 and compare HMOs on utilization and quality of care measures. Baumgarten has also published market analyses in Arizona, California, Colorado, Florida, Illinois, Kentucky, Minnesota, New York, Ohio, Texas and Wisconsin.

In his annual analysis of financial metrics and enrollment trends for Michigan's health insurance companies, Baumgarten found:

 Michigan HMOs posted net income above $300 million for the first time. In 2011, Michigan HMOs had net income of $303 million, or an average margin of 2.6% of operating revenues. Blue Care Network was the most profitable, with net income of $163.7 million, or 6.2% of revenues.

Michigan HMOs made money on all lines of business: employer groups, Medicare and Medicaid. Group plans were especially profitable this year, but HMOs also had average margins of 5.7% on their Medicare plans and 2% on Medicaid.

 Medicaid enrollment is likely to surpass employer group membership in the next year.  State leaders need to decide whether to participate in the expansion of Medicaid eligibility under the Affordable Care Act. In Michigan it would bring coverage to an estimated 400,000 persons between 2014 and 2019, most of who would likely enter HMOs. And if the state proceeds with its plan to enroll use seniors and disabled Medicaid recipients in managed care, that would add 200,000 or more enrollees. To position themselves for this expected growth, Michigan HMOs bought three Medicaid plans in the past year.

Growth in small group and individual plans for HMOs is also expected. Subsidized coverage through a health insurance exchange could bring in an estimated 360,000 new enrollees, depending on which companies elect to market to them.

Enrollment in Medicare HMOs, which has been relatively low here, has surged in the past three years and will likely pass 200,000 this year. Future growth is likely to be strong, as baby boomers retire and examine their Medicare options.

 Employer premiums grew faster than medical expenses in 2011, leading to strong profitability. On average, HMOs collected $339 per member per month from their employer customers, an increase of 5.2% from 2010. Their medical expenses increased by 2.5% to $298.

Excerpts from the report, including the useful "Michigan HMOs at a Glance" page can be viewed at www.AllanBaumgarten.com. Links to PDF downloads of reports for Arizona, California, Kentucky and New York are also on the web site. A subscription to Michigan Health Market Review 2012, including both Parts One and Two, can be ordered from Allan Baumgarten for $160.00. Call 952/925-9121 or fax 952/925-9341. E-mail address: Baumg010@tc.umn.edu

  May 4, 2012

Michigan Hospitals Enjoy Strong Profitability; Integration and System Building Continue

Part Two of Michigan Health Market Review 2011 is released this week. Below is a brief summary of the report, which analyzes hospital profitability and utilization using 2010 data and updates enrollment information and financial results for Michigan health plans through June 2011. Part One of Michigan Health Market Review 2011 will be released in late June. The 2012 report will be the 16th annual edition of our Michigan market analysis, which was first published in 1997.

Michigan hospitals enjoyed strong profitability in 2010 and are continuing their consolidation into integrated regional systems. In the last five years, organized systems of care have become increasingly important in regions outside of southeast Michigan. Religious systems, such as Trinity Health, and others, like McLaren (based in Flint) and Spectrum (Grand Rapids) have acquired additional hospitals, expanding their geographic reach and increasing their negotiating power with health insurers.

The report finds:

Detroit area hospitals posted strong profits in 2010, realizing their best results in at least 10 years.  According to our analysis of data from Medicare cost reports for 2010 fiscal years, hospitals in the area had net income of $357 million, or 3.4% of net patient revenues of $10.5 billion. That compares to a loss of $58 million for these hospitals in 2009. They still lost money on operations, but had $554 million in other revenues from investments, philanthropy and government grants. The Beaumont hospitals had the highest net income in 2010, $84.4 million, and the two Trinity hospitals had the highest margins, averaging 6.9%.

 Net income was also higher at 32 major hospitals in other parts of the state. They had net income of $673.3 million, or 5.9$ of net patient revenues, compared to average losses of 2.4% in 2009. The University of Michigan and Spectrum hospitals were the most profitable in 2010.

Inpatient hospital days at Detroit area hospitals dropped for the third straight year in 2010. Rising unemployment, declining population and the growth of high deductible plans are exerting downward pressure on utilization. But while the number of hospital days covered by commercial payers has dropped by 10.2% since 2008, the number of days covered by Medicaid has increased by 8.9%.

 Even as inpatient utilization has declined, hospital system are making large investments in new facilities and adding capacity. While the new hospitals in Novi and West Bloomfield are apparently meeting projections of patient volume, some of that may be from cannibalizing the other hospitals in those systems. Vanguard, the for-profit company that acquired the Detroit Medical Center hospitals, has announced plans to build a major ambulatory care center in the suburbs, as it attempts to draw market share in those parts of the region.

Enrollment in HMOs was largely flat in the first half of 2011, with only Medicare plans reporting moderate growth. After years of declining enrollment, commercial (employer) plans have been flat for two years. Enrollment in Medicaid HMO plans (and Medicaid generally) has driven the growth of HMOs in the state in recent years, but that enrollment did not increase in the first half of 2011.

HMOs had margins averaging 2.1% for the first half of 2011. As with hospitals, consolidation continues on the HMO side as well. This spring McLaren Health Plan announced that it would acquire CareSource Michigan, a Michigan subsidiary of a large Ohio Medicaid plan. Last fall Health Alliance Plan acquired Midwest Health Plan, a Medicaid plan with about 73,000 enrollees.

© 2013 Allan Baumgarten. All rights reserved.