A Closer Look at Hospital Competition: Terrace Park Spurs Growth for Trinity; Genesis Holds Steady Print
News/Features - Feature Stories
Wednesday, 12 September 2007 02:38

(Part one of a series. Part two can be read here , and part three can be read here .)


When Trinity purchased the Davenport Medical Center in August 1999, it didn't take long for its intentions to become apparent. It bought land in Bettendorf and in April 2000 announced plans to replace its North Campus (what was the Davenport Medical Center) on the new site.

Basically, Trinity was gaining control of hospital beds in Iowa so that under state law it could replace them in a gleaming, state-of-the-art facility: Trinity at Terrace Park. And that facility would compete directly with Genesis Health System's hospitals in the Iowa Quad Cities.

A hospital can't, without state approval through Iowa's "Certificate of Need" program, add new beds, but it can replace existing beds. That's the regulatory context in which Trinity bought a facility that it had no real use for.

"We needed, to be successful as a system, to provide service to the entire region," said Bill Leaver, president and CEO of Trinity Regional Health System, of the challenge of penetrating the Iowa side of the Quad Cities market. "The old Davenport Medical Center was not going to be that facility, just because of the way it was laid out, its age, and its location - it wasn't in the right place. ...

"You cannot just be in Illinois and provide to the region.

"Second is a little bit of going where the population is. When it's growing on the Iowa side, you have to go where the people are." According to the U.S. Census Bureau, the population in Scott County grew 2.5 percent between April 1, 2000, and July 1, 2006; the population in Rock Island County fell by 1.2 percent for the same period.

What's important to understand is that what's happened in the Quad Cities hospital market over the past two decades has not been leading to the current situation. Rather, where things stand now is a necessary balance - of organizations and facilities on both sides of the river - that sets the stage for future competition.

The reimbursement system is increasingly tight, with both governments and insurance companies reducing their payments to health-care providers. That has driven hospitals to be more efficient.

And now there is an increasing focus on quality, with more transparency on hospital outcomes and even financial rewards from the federal government (in terms of its public-aid reimbursement rates) for hospitals that show their services are improving medical results.

Next week's article will focus on the importance and challenges of the emerging hospital competition related to outcomes. This article deals primarily with economic competition between the two not-for-profit health systems in the Quad Cities.


Economies of Scale

The $72-million Terrace Park was Trinity's entry into the Iowa Quad Cities hospital market, in direct competition with Genesis' two campuses in Davenport. And it was a response to the 1996 affiliation of Illini Hospital in Silvis with Genesis, which started competition with Trinity's two campuses on the Illinois side of the river.

The opening of Trinity's Terrace Park campus in February 2004 was the culmination of a 16-year transition for hospitals in the Quad Cities. What in 1988 was a handful of unrelated Quad Cities hospitals had been transformed through consolidation and affiliation into Genesis on the Iowa side of the Mississippi River and Trinity on the Illinois side.

Trinity - now the third-largest employer in the Quad Cities - was formed in 1992 from what had been three hospitals in Illinois. And Genesis - now the area's second-largest employer - was created in 1994 with the consolidation of Mercy and St. Luke's hospitals in Davenport. In addition to Genesis' 1996 affiliation with Illini Hospital, the health system became affiliated with the hospital in DeWitt in 1997.

That consolidation was a sea change spurred by economies of scale, said Bob Travis, vice president of strategic development for Genesis Health System. "Health care is so expensive that anything we can do to reduce duplication" is desirable, he said.

For instance, Genesis unified specialties onto one Davenport campus or the other - heart on the east for instance, and orthopedics on the west - and reduced roughly 90 administrative positions. Travis said savings to the community totaled $100 million over five years.

"The price [paid for health care by governments and insurance companies] is set in most cases," Leaver said. "It's fixed. ... That economic system has driven hospitals to say, ‘We can't be independent islands anymore.' ... There is not enough capital to invest in seven separate, independent hospitals."

But the initial consolidation meant there was little geographic competition. Genesis owned the Iowa Quad Cities, and Trinity owned Illinois.

The affiliation of Illini with Genesis and the construction of Terrace Park meant that the hospital game was no longer as provincial - in other words, that each health system was going to actively compete for the customers of the other.

"Are we two markets or are we one in the Quad Cities?" Travis asked. "Both the systems believe it's one market. And it is one market. People do cross the river for their health care."

"I think competition in the future will not be so much around the facilities and technology," Leaver said. "It will be around the outcomes that you create. ...

"Historically, closeness may have been a bigger factor," Leaver continued. "Going forward, it's going to be people having access to quality data, understanding how good is Genesis or how good is Trinity for the condition that I'm seeking care for."


Healthy Hospitals

Nationwide, there's some worry about the health of hospitals. In both Illinois and Iowa, more than 30 percent of hospitals have negative operating margins, and more than 50 percent have negative patient margins, according to the most recent data from each state's hospital association. That means that roughly a third of hospitals in the two states are losing money, and more than half are losing money on patient care.

The main problem, said Iowa Hospital Association Communications Director Scott McIntyre, is that the Medicaid and Medicare programs "simply do not pay their costs." That is particularly acute in what McIntyre called "tweener" hospitals - those that aren't large enough to offset their public-aid losses with privately insured patients but aren't small enough to qualify for the federal "Critical Access Hospitals" program for Medicare that guarantees above-cost payment levels.

The main hospitals at Genesis and Trinity are in urban centers, and their finances are encouraging. In their 2006 fiscal years, both hospital systems had operating margins of more than $19 million - which represents almost 5 percent of Genesis' operating revenue and 6.5 percent of Trinity's.

And Genesis also has positive patient margins, said Mark Kleinschmidt, chief financial officer of Genesis Health System - 5 to 6 percent at its Davenport facilities and 2 to 3 percent in DeWitt and at Illini. As of press time, Trinity had not provided information on its patient margins.

Overall, though, those operating-margin numbers have been buoyed by the performance of the core hospitals. Genesis' DeWitt and Silvis hospitals each had negative operating margins at least once between fiscal years 2004 and 2006.

Trinity at Terrace Park, meanwhile, lost more than $10 million in its first two years in terms of operating revenue - almost $7.7 million in 2004 and nearly $2.7 million in 2005 - with Trinity's Illinois operations responsible for all the health system's positive operating margin those years.

The losses at Trinity, Leaver said, were expected: "We anticipated that. Absolutely."

Trinity at Terrace Park had a positive operating margin of $827,000 in Fiscal Year 2006.

The hospital systems' operating margins are particularly impressive given some of the cost pressures they face.

For instance, neither Trinity nor Genesis turns anybody away who needs care. As a result, the amount of care each hospital system has provided without compensation has grown dramatically - up 28 percent (to almost $30 million) from 2004 to 2006 for Genesis and up 41 percent (to more than $25 million) for Trinity. Uncompensated care includes both charity care and bad debt. For both systems, charity care has grown more quickly than bad-debt care.


Questions of Need and Scale

Concurrent with concern about hospital operating-revenue and patient-revenue margins is a spending spree. In a January 2006 article, USA Today summarized: "The USA is in the middle of the biggest hospital-construction boom in a half-century, a development expected to increase the use of high-tech medicine and add fuel to rising health care costs. ... The hospital industry has spent nearly $100 billion in inflation-adjusted dollars in the past five years on new facilities, up 47 percent from the previous five years, according to the Census Bureau."

Those seemingly contradictory trends reflect the challenging market for hospitals today. Reduced payments are pinching (or eliminating) their margins, while increased competition and a new emphasis on outcomes are forcing them to upgrade their facilities and their services.

The key questions raised by this spending by hospitals are related to need and scale. If a hospital overbuilds its medical infrastructure, those costs are going to be passed along to customers with private insurance, who will end up paying higher premiums.

As Travis said, "Somebody's paying for any new building you build."

But he admitted that there's a strong incentive to not build unnecessary medical infrastructure; competition puts a downward pressure on medical prices. "We are competing, and we compete on price as well as quality. Both systems are pretty price competitive."

It's also worth noting that Terrace Park is hardly Trinity's only major capital expenditure, and Genesis is improving its facilities as well. Capital projects are a fact of life as hospitals adapt to the health-care environment, for example by adopting new technology or realigning their facilities to deal with larger volumes of outpatient procedures. Trinity is presently in the midst of a $19-million renovation and expansion at its west campus in Illinois. And over the past five years Genesis has spent more than $59 million in capital projects greater than $1 million.

Still, it's a reasonable question whether Trinity should have built Terrace Park at the size it did.

Both Illinois and Iowa have a "Certificate of Need" program that is meant to prevent unnecessary construction. In Illinois, there's a $7-million trigger, meaning that any $7-million construction project by a health-care facility requires approval from the state.

Under Iowa law, though, a hospital doesn't need to secure a Certificate of Need if it's only replacing or modernizing an existing facility. So because Trinity was replacing the Davenport Medical Center with Terrace Park, it didn't go through that state evaluation process.

The concern ab out cost is illustrated by recent actions by Wellmark, Iowa's largest private insurer. Earlier this year, the company challenged in court the construction plans for two replacement hospitals in the Des Moines area, seeking a narrowed interpretation of the Certificate of Need program. Basically, Wellmark wanted the courts to force the hospitals to prove that the facilities were necessary.

The company's vice president said in a press release: "What we oppose is the building of multi-million-dollar hospital buildings without public input through the established process known as Certificate of Need."


The Effect of Terrace Park

Reasonable people can argue whether Terrace Park was necessary at the size it was built, but it has certainly altered the competitive balance in the Quad Cities.

According to Travis, Terrace Park's hasn't had much impact on Genesis. "If you look at their volume when it was Trinity North [the former Davenport Medical Center], and their volume today [at Terrace Park], it's about the same," he said. "Their average daily census is still under 28, and that's comparable to what it was at Trinity North."

Leaver said that overnight census is "not a real reflection of how it's being used," because inpatient care is a diminishing component of a hospital's business. "How many people you have staying overnight is kind of an archaic way to think about use of hospitals, because so much of our business is outpatient use," he said. "When you look at emergency-department visits, starting out we were averaging 30 or 35 a day [at Terrace Park]; we're now routinely at around 50 or 55 a day."

These two lines of thought might sound like spin - and they are - but they're also true. The reality is that over a range of usage measures, Genesis hasn't been affected much by Trinity at Terrace Park, yet Trinity has seen growth over the past three years because of its new hospital. Most likely, Trinity at Terrace Park has cut into Genesis' growth in the three-plus years it's been open, rather than its existing business.

According to data submitted by each health system to the American Hospital Association (AHA), Genesis is still the dominant hospital force in the Quad Cities, but Trinity is gaining.

Across seven core usage areas tracked by the AHA (births, admissions, inpatient days, emergency-room visits, outpatient visits, inpatient surgeries, and outpatient surgeries), Trinity had a higher growth rate - or a lower loss rate - than Genesis over the past three years. (The statistics aren't exactly comparable, because Trinity operates on a calendar fiscal year, while Genesis' fiscal year runs from July to June. Genesis' numbers, therefore, are six months behind Trinity's, even though they both cover 12-month periods.)

For example, births at Genesis hospitals dropped nearly 4 percent from 2004 to 2006 (to 3,281), while Trinity's jumped more than 8 percent (to 1,705). Admissions at Genesis were down nearly 2.5 percent for that period, while Trinity's rose almost 2.3 percent. Emergency-room visits were up slightly less than 2 percent for Genesis, but more than 14 percent for Trinity.

Those trends were mirrored in revenues and costs. Genesis' operating revenues for that time frame rose 7.2 percent (to just more than $386 million), while Trinity's jumped more than 33 percent (to almost $298 million). Genesis' costs were up 6 percent (to $367 million), while Trinity's grew by nearly 25 percent (to $278 million).

"Certainly, we are taking some business from Genesis," Leaver said. "I have no doubt about that. Secondly, the Iowa side is growing population; the Illinois side is not."

"Our market share dropped slightly," Travis conceded. "At our height, we had an 82-percent market share in Scott County." In other words, 82 percent of Scott County residents who were hospitalized used Genesis. "Now we're down to 79 percent market share."

Leaver said that any shift in market share happens slowly.

"For 30 years, Genesis [and its forebears] had a dominant, almost sole, provider basis on the Iowa side," he said. "That is not going to change overnight."

Genesis' Travis said he thinks Terrace Park is an underutilized facility.

"If Trinity had a magic wand, they probably wouldn't have built Trinity at Terrace Park at quite the size they did," he said. "One thing about a competitive system is you can anticipate and forecast the future, but nobody's 100-percent accurate.

"I doubt that they intended to spend $80 million on that facility, and yet three and a half years later, be only at an average census of 28" out of 139 licensed beds.

That is supported by Trinity at Terrace Park's 2006 statistical report. The facility's admissions in 2006 were 8 percent above the budgeted amount, and it outperformed the budget in other areas as well: nursery and birth statistics, its cardiac-cath lab, emergency-room visits, and laboratory tests, for example.

But (excluding the nursery numbers) patient days, occupancy rate, daily census, length of stay, and surgery minutes were all below budget for the year.

Leaver said that the facility is still two years away from optimal use, although he said Trinity doesn't have a target market share that it hopes to reach. The hospital's "frequently asked questions" page last week said that the new hospital is expected to reach its "intended service volume" in 2007.

"We're very pleased," Leaver said. "We're basically right on track with where we thought we would be. I think we're very encouraged by the increasing use by the citizens of Bettendorf and surrounding areas of our emergency department at Terrace Park. We're getting exposed more and more to people on that side of the river. ...

"We also recognize that we have a ways to go. We have not had a significant presence in Iowa prior to 1999, when we purchased the Davenport Medical Center. And Terrace Park just opened in 2004. So it's not like we've been in the Iowa market forever and ever. It just takes time. People have a lot of loyalty."

Words such as "market" and "loyalty" reflect the reality of hospital rivalries in this community and across the country. Hospitals are making huge infrastructure investments in an effort to gain some advantage over their competitors.

Health-care consumers almost surely benefit from better service, technology, facilities, and outcomes. The danger is an overzealous competition in which hospitals build facilities that are too large for their markets, that aren't justified by a community's growth. And if that happens, consumers pay the bill.


Next week's article will explore the mechanics of the new competition, and how quality does - and doesn't - matter. It can be read here , and part three can be read here .

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