Editors’ Note: The Tahoe Forest Hospital District Board of Directors held a special board meeting on Friday, July 11, where they held a closed session on the performance of CEO Bob Schapper. During open session, the board noted that it had been investigating the possible conflict of interest between Schapper, his wife Marsha Schapper, and Medical Practice Solutions for the past couple of months and that the investigation is ongoing. The board also said it would respond publicly to Moonshine Ink’s most recent reports on the hospital in the publication’s next issue.
Over the last decade, Tahoe Forest Hospital has undergone a dramatic transformation. Bankrolled largely by taxpayer funding, the hospital embarked on large-scale building plans that converted a small community hospital into a healthcare center with regional ambitions and a desire for a national reputation.
Tahoe Forest Hospital is reaching the tail end of its decade-long expansion funded by $98.5 million in taxpayer funding generated by the Measure C voter-approved bond. But even after the infusion of taxpayer money, troubling signs point to a turbulent future for the hospital. In the 2013 fiscal year, Tahoe Forest Hospital recorded a $5.8 million loss in operating revenue. In the recently completed 2014 fiscal year, the district projected it lost approximately $1 million (audited financials have not been completed for 2014). So far this year the hospital is running deficits as it grapples with a difficult electronic medical records conversion project and slumping patient admission numbers. Inpatient days for Tahoe Forest Hospital’s intensive care unit will go from a high of 545 days in 2010 to a projected 275 days in the 2015 fiscal year, according to hospital projections. Similarly, medical surgical days that were 3,029 in 2010 are expected to drop to 2,775 in the 2015 fiscal year. Diagnostic imaging is projected to drop from 2,130 patient days in 2010 to 1,581 patient days in 2015.
The hospital district has projected another $2.6 million loss in the 2015 fiscal year. Some of those losses are due to the depreciation of buildings built with Measure C funding, an added cost that was anticipated, said Tahoe Forest Hospital Board member Roger Kahn, who emphasized that he was speaking only for himself and not for the hospital or the board in general. Kahn said a better measure of the hospital’s finances is the Earnings Before Interest Depreciation and Amortization figure. That figure shows earnings of $2 million budgeted for 2015.
Standard & Poors reviewed the hospital’s bond rating in January 2014 and downgraded the hospital from “positive” to “stable,” reflecting increased concern of the hospital’s financial stability.
The hospital has responded to its worsening financial position by raising prices. In February, the hospital raised prices by 5 percent, and the district will increase prices by another 5 percent in August, making for a 10 percent increase in prices in six months.
If you place the Tahoe Forest Hospital of 10 years ago side by side with the Tahoe Forest Hospital of today, you’d be hard pressed to see that they were the same institution. Over the last decade and a half, a small, community hospital has transformed into a health system with a brand new $32 million cancer center, a large network of outpatient health services, and a newly remodeled emergency room and Western Addition.
It has doubled its revenue, increased its prices, and nearly quadrupled the amount it spends in “professional fees” to more than $18 million — a category of expense that includes consultants, outpatient doctor contracts, and hospital vendors.
Tahoe Forest Hospital is facing new and unprecedented challenges. Healthcare reform is changing how the hospital is reimbursed for procedures and hospital stays. The hospital’s payor mix is putting pressure on its bottom line as the percentage of commercial insurance patients declines, and Medicare patients increase.
Increasing price competition from Northern Nevada medical institutions threatens to siphon off patients to lower-cost facilities only a half hour away. National healthcare is now moving toward a system that rewards health outcomes over fee-for-service procedures. And growing community concern is questioning the management and operating expenditures of the hospital.
The Business of Not-for-Profit Hospitals
Tahoe Forest Hospital reaps immense financial advantages from being a public, special district hospital, but functions in much the same way a private hospital would operate.
Truckee and North Tahoe taxpayers contribute approximately $5 million in property tax to the district every year, and taxpayers have also footed the $98.5 million Measure C bond that has financed the cancer center, emergency department overhaul, maternity ward upgrades, central power plant rebuild, and seismic retrofits.
But Tahoe Forest Hospital benefits in other ways because of its public, not-for-profit status. The hospital’s foundation marshals hundreds of thousands of dollars of community donations each year. The hospital is exempt from property taxes and corporate income taxes that a private hospital would have to pay.
But few of these financial advantages are noticeable to the patient. The billing and care at Tahoe Forest Hospital is similar to a private hospital experience. And while Tahoe Forest Hospital doles out charity care to patients unable to pay, so do private hospitals around the country.
Because of the significant financial advantages they enjoy, not-for-profit hospitals have come under increased scrutiny over the last several years as the public begins to better understand the business of nonprofit hospitals.
Nonprofit hospitals enjoy an estimated $12 billion in tax breaks, according to a New York Times article from Dec. 16, 2013. And many critics argue that the community benefits of nonprofit hospitals, especially the “charity care” they give away, is a vastly inflated figure because it is based on “chargemaster” prices that overestimate the value of the care that is given away. Chargemasters are hospitals’ internal pricing system that sets prices that almost no one ever pays. Insurance companies, Medicare, and even self-paying patients all negotiate much better rates than the chargemaster sets.
“The standard nonprofit hospital doesn’t act like a charity any more than Microsoft does — they also give some stuff away for free,” John D. Colombo, a professor of tax law at the University of Illinois Urbana-Champaign, told the New York Times. “Hospitals’ primary purpose is to deliver high quality healthcare for a fee, and they’re good at that. But don’t try to tell me that’s charity. They price like a business. They make acquisitions like a business. They are businesses.”
Cost of Care
Tahoe Forest Hospital approved a 5 percent increase in cost of care in February 2014, and will raise rates another 5 percent in August.
But not all rates have gone up equally. In fact, some rates that affect local citizens the most — like the room rates for newborn delivery — have increased dramatically. In 2010, the rate for a delivery room stood at $1,603, according to the 2015 Tahoe Forest Hospital budget. In 2011, that rate almost doubled to $3,030. The rate climbed again to $3,636 in 2012. In August 2014, a delivery room rate will stand at $4,032, a staggering 151 percent increase in four years.
Tahoe Forest Hospital has limited cost increases over the last several years. Between 2008 and 2013, the district only increased costs by 10 percent, according to the 2015 hospital budget.
Some hospital officials are concerned that the increased prices will decrease hospital admissions. John Mohun, Tahoe Forest Hospital Board president, was the lone vote opposing the price increases.
“I voted against the price increase because we just had one in March. We have too much out-migration,” said Mohun, referring to local residents who choose to get care in Reno or other neighboring communities.
Board member Kahn said the board struggled with the decision to raise prices but he ultimately voted for the price increases as a way to put the hospital district in a better financial position.
“I am always concerned when you have to raise your prices,” said Kahn. “We feel that we have to do that in order to run the district and do our fiduciary responsibility that we are not losing money. We grappled with that.”
Dissecting a Bill: The $15 Ibuprofen Tablet and $153 IV Bag
In presentations on pricing to the hospital’s board of directors, Tahoe Forest Hospital administration says their prices are lower than their competitors. But price comparisons are done on a set number of high frequency billing codes and not on the total cost for hospital stays. Also, Tahoe Forest Hospital often compares itself with private hospitals of similar size, not taxpayer-funded special district hospitals that receive property tax support and tax-exempt status.
So, perhaps the best way to understand a Tahoe Forest Hospital bill is to look at one. Because of patient privacy concerns, the reporter chose to analyze his wife’s labor and delivery bill from 2012, before the 10 percent price increase that will be in effect by August. The bill covered a conventional childbirth at Tahoe Forest Hospital.
The bill illustrates the haphazard and highly inflated nature of inpatient billing at Tahoe Forest Hospital. Each 800-milligram ibuprofen tablet cost the patient $15.50. The patient was charged for seven tablets during the hospital stay, for a price tag of $108.50. A 100-tablet bottle of 800mg ibuprofen can be purchased online for $10.
Two vials of Lidocaine were charged at $143. At online medical provider Emergency Medical Products, Inc., the same vial can be purchased for $1.75.
A 1,000-milliliter bag of IV solution at the hospital cost $153 each. The same bag can be purchased from Emergency Medical Products for $2.94. The patient was charged for two bags at $306 for a product that could have been bought online for less than $6.
The charges go on. Some seem random: $258 for “postpartum recovery;” $63 for a single suture. Even medical equipment that seems like it would be reusable and covered under the room rate registers as a charge on the bill. A blood oxygen sensor is charged at $192.15 and a resuscitation bag charge comes in at $257.25.
But all of these prices, inflated exorbitantly, are only the beginning of the bill. The hospital makes much of its money from room fees. On this bill, the patient was charged two room fees in a single day — $3,636 for the delivery room and $2,250 for a semi-private room. Total room fees for a single day equaled $5,886. The next day another $2,250 room fee was charged, bringing the two-day total in room fees alone to $8,136.
But this still does not capture the entire billing process. Doctors, anesthesiologists, and any other specialists involved in a procedure all bill the patient separately. So after the $15 ibuprofen tablets, the $153 IV bags, and the $8,136 in room rates have been accounted for, the patient starts receiving separate bills from the doctor, the anesthesiologist, and other specialists involved.
This remarkable unbundling of the billing process allows Tahoe Forest Hospital to generate profits for individual items during a hospital stay. The bill for the Tahoe Forest Hospital childbirth listed 43 separate charges, including every drug and piece of medical equipment used during the hospital stay.
This method of billing is a uniquely American way of charging patients and has resulted in uniquely expensive costs. Charges for delivery have about tripled since 1996, according to an analysis done for the New York Times by Truven Health Analytics. According to the newspaper, four million annual births in the U.S. account for well over $50 billion in payments each year. The average payment for a conventional childbirth in the U.S. totals $9,775, compared with $2,641 in Great Britain.
Even Tahoe Forest Hospital leadership acknowledges that the billing system is flawed.
“The charge structure in healthcare is very complicated and confusing and needs to be overhauled,” said Tahoe Forest Hospital boardmember Larry Long. “I am not just saying that about Truckee, but the nation as a whole. We try to work with it the best we can.”
An issue that makes the costs even more frustrating for homeowners is the fact that Tahoe Forest Hospital is not a preferred hospital for some of the largest employee groups in town. Tahoe Forest Hospital is not a preferred hospital for one tier of the two-tier PERS system that covers state workers and Town of Truckee employees. This means that local homeowners covered by PERS who pay property tax to Tahoe Forest Hospital have to pay a 10 percent out-of-pocket premium if they receive care at Tahoe Forest Hospital, or can choose to go to a preferred hospital and save that 10 percent out-of-pocket charge.
Other Public Hospitals Make Bold Changes
Healthcare billing and delivery is rapidly changing. And some public hospitals are making bold moves to make the billing process more fair and transparent.
The Maricopa Integrated Health System, a Phoenix-area public hospital, recently slashed its self-pay prices in half, providing reasonable and transparent rates that are rarely seen in the U.S. healthcare system. The chargemaster prices are published on the healthcare system’s website, and reflect rates that are only 1 to 2 percent above the Medicare fee schedule. While charging patients a transparent amount that is above Medicare rates may not seem particularly groundbreaking, the move by Maricopa is a radical departure from the secrecy and wildly inflated chargemaster prices that govern the majority of U.S. healthcare.
According to a price listing on Maricopa’s website, local residents can pay for a maternity package priced at $3,850 that includes all physician fees. If payment is made in full within 90 days, the package price drops to $2,888.
“As a result of its bundled price for maternity care, Maricopa officials estimate the hospital is delivering 50 to 60 more babies a month,” a recent Modern Healthcare article on the hospital noted.
The dramatic reduction in published healthcare prices has had little negative effect on the hospital’s bottom line. Maricopa officials found that the price reductions allowed patients to actually pay their medical bills, rather than walking away from an unpayable mountain of medical debt and saddling the hospital with more “bad debt.”
While the changes are not expected to boost the hospital’s bottom line, that was never the objective in the first place, said Joseph Fifer, CEO of the Maricopa healthcare system, in a Modern Healthcare article.
The change is “timely because consumers are beginning to pay attention to prices, and that trend will grow as more people move into high-deductible health plans and become more cost-conscious healthcare shoppers,” Fifer said.
According to the magazine, “The return on investment for starting a transparency program like Maricopa’s is ‘either very, very low or nonexistent. But that’s not the motivation for this,’” said Fifer. “Some providers are starting to do it because it’s the right thing to do, while others are doing it because they face political or market pressure.”
A Layer of Management Followed by a Layer of Consultants
If you place the Tahoe Forest Hospital budget of a decade ago alongside the Tahoe Forest Hospital budget of today, the increase of one budget line item called “professional fees” sticks out.
Professional fees cover several categories of expenses. They pay the contracts of the doctors at the outpatient multi-specialty clinics. They also cover consultants, legal fees, and other outside vendors that work for the hospital on a contracting basis.
In 2003, the hospital recorded $4.7 million in professional fees. By 2013, that number had more than quadrupled to $18.1 million, growing more than twice as fast as revenue, other expenses, and salaries.
Some of that growth in professional fees can be attributed to the expansion of the multi-specialty clinics. According to the 2015 hospital budget, the clinics are forecast to spend $5.2 million in professional fees. That still leaves more than $13 million in professional fees for other areas of hospital operations.
Tahoe Forest Hospital boardmember Long said the professional fees are justified because they mirror a growth in hospital services that has benefited the public.
“We’d like not to pay it, but as you add new services and facilities we have found that we need to do it,” Long said.
Hospital board member Roger Kahn said that some of the increase in professional fees is tied to payments the hospital makes to doctors so that they can be “on call” for emergencies.
But some community members strongly disagree that the current level of professional fees are justified.
Mark Spohr, a physician and Tahoe City resident, said the high cost of professional fees points to a management structure that is over-reliant on consultants.
“I think it is outrageous to pay excessive salaries to management when they don’t seem to be able to do their jobs without hiring consultants,” said Spohr. “We need to find administrators who can do their work without expensive consultants.”
Tahoe Forest Hospital has relied on numerous consultants, including Insight Oncology, Sierra Nevada Oncology, and Goldman Consulting, to operate the cancer center. They have also recently brought in numerous consultants to handle its medical records conversion and the billing processes after the conversion took place this past year.
Competing Visions for the Hospital’s Future
The upcoming November hospital board election should be one of the liveliest contests the special district has seen in years. Board candidates are already lining up to vie for a spot on the five-person board that will have three seats up for election in the fall.
Local resident Gaylan Larson, who also sits on the Tahoe Truckee Unified School District Board, organized meetings this spring to generate interest in hospital board candidacy. He had become interested in the inner workings of the hospital after a 2012 article in Moonshine Ink raised questions about the costs and potential conflicts of interest at the district. Larson’s interest grew stronger when the hospital district raised the Measure C property tax rate to more than $30 per $100,000 of property valuation — an unforeseen increase that nearly doubled the highest tax amount that was forecast when the bond was passed in 2007.
“The more information I got, the more questions I had, and the worse it looked,” said Larson of his questions about the operation of Tahoe Forest Hospital.
And the vision that came out of the meetings that Larson organized was a stark departure from the current path the hospital is on.
At least two community members — physician and medical software executive Spohr and former boardmember John Falk — are planning to run for board seats.
Spohr said his main reason for running for a board seat is to return a community focus to the hospital.
“I am concerned that the current board is not focused on the community,” he said. “It has approved expensive projects that do little to improve community health and has let the hospital administration inflate prices and costs.”
Spohr is weighing bold ideas, like a dramatic change of course for the hospital’s cancer center.
“The cancer center is problematic,” said Spohr in an email to Moonshine Ink. “They have spent $32 million of taxpayer bond funds on the facility and it provides little value to the community. The few patients who are treated there are subject to outrageous overcharges. The building is half empty and the other half is grossly underutilized. The cancer center is a high-cost, low-volume facility and is very inefficient. It will require creative thinking to return value to the taxpayers by finding productive uses for the building and equipment to provide value to the taxpayers who are paying for it. It must change.”
Spohr and others have pointed out that the cancer center loses money in all of its medical and oncology services, but that shortfall is made up by an enormous windfall of profits in oncology drugs. The cancer center’s medical oncology departments are projected to lose $2.2 million in 2015, and radiation oncology is projected to lose $291,000. The only area of the cancer center making money is oncology drugs, which is expected to make $7.2 million in 2015.
Boardmember Long said oncology drug revenue cannot be accurately separated from oncology medical procedure reimbursement because they are part of the same process and cannot be evaluated individually.
“It would be hard to separate that out from the bundle of other cancer care,” he said.
Long said he is satisfied with the performance of the cancer center.
“I am totally impressed with the cancer center and how it has evolved. The community is embracing the cancer center and the volumes are good and better than we were projecting,” said Long. “We move forward, and the proof is in the operational performance and the care that has been provided.”
Operating expenses are another source of concern for Spohr.
“The hospital suffers from high administrative overhead, excessive salaries, and high prices, which drive people to other facilities,” said Spohr. “The new board needs to lead a determined effort to cut costs, outrageously high salaries for some administrators, inefficient staffing, and salaried doctor contracts. It also needs to reduce prices for locals so that they will use the hospital rather than go to Reno. Increased volume will generate more revenue and improve efficiency.”
November will likely be a heated referendum on the track record of Tahoe Forest Hospital leadership and the decisions over the last decade that have built the hospital into what it is today. But the discussion will most likely shift to the future of the Tahoe Forest Hospital District, the costs of care, and Tahoe Forest Hospital’s place in the rapidly changing national healthcare landscape.
~ This article was funded in part by a grant from the Fund for Investigative Journalism.