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Our Hospitals Are Hurting

Revenues increase but profits plummet as Puerto Rico’s hospitals are buffeted by lower income, rising costs, declining Medicare reimbursements, exorbitant malpractice insurance rates, and a brain drain to the North


February 7, 2002
Copyright © 2002 CARIBBEAN BUSINESS. All Rights Reserved.

Tough solutions for tough times: Private hospitals fight for survival by cutting costs, expanding services, and specializing

"I have been in this industry for 30 years and have never seen it in such a crisis," Alfredo Volckers, Pavia Health’s executive vice president, said ominously.

Local hospital executives are working hard to make ends meet as they face a number of financial challenges. Many say this difficult situation could be reversed if only the government would appreciate the importance of the industry and support it.

"If the government would only realize that hospitals compose an industry and are not social charity organizations, we would be better off," said Joaquin Rodriguez, CEO of the Inter American Hospital of Advanced Medicine (HIMA by its Spanish acronym). No one appreciates that we need to turn a profit if we want to continue operating. We need to send the message that hospitals are businesses like any other that can’t afford to be giving away services and losing money. How are we going to keep up-to-date with technology and offer the best services if we don’t have money to invest?" Rodriguez asked rhetorically.

The local hospital industry directly employs more than 40,000 people, according to Alfredo Volckers, Pavia Health’s executive vice president, said ominously. It also contributes between $5 billion and $7 billion to the local economy each year, added Rodriguez. "However, while other industries such as tourism and manufacturing are showered with diverse types of economic incentives, the hospital industry is given only a 10-year tax exemption and we still have to pay 100% of our utility bills. At HIMA we pay an average energy bill of $100,000 each month," Rodriguez said.

Although revenues at local hospitals have increased, that doesn’t mean they’re enjoying a positive financial situation, according to industry executives interviewed by CARIBBEAN BUSINESS. "Last year, only 1.95% of our revenues were profits," said Rodriguez.

Some of the problems aggravating the financial health of hospitals are insufficient Medicare reimbursements, late payments from health insurers, high malpractice insurance costs, and employee migration to the mainland U.S.

The quest for profits

Most local hospitals’ revenues increase every year, but only because their operations have been fine-tuned to make them as cost-effective as possible and because many have expanded their services.

"We expect our total gross revenue for 2002 to reach $268 million, up from the $248 million we registered in 2001. This increase is due to the expansion of services we have undertaken to bring in more money," explained Ivan Colon, Auxilio Mutuo Hospital’s administrator.

Auxilio Mutuo recently enhanced the pediatric and adult emergency rooms as well as outpatient departments such as the clinical laboratory and nuclear medicine. The hospital also expanded its cardiovascular surgery center and its neurology department. By October, a new cancer center should be operational, said Colon.

Volckers said Pavia Health has plans to establish a radiotherapy center, double the number of beds in the psychiatric ward to 40, and invest about $500,000 in new equipment for the urology department. "We plan to add a plastic surgery center to our hospital in Hato Rey and to enhance our cardiology, neurosurgery, and Ob-Gyn departments. We are also contemplating adding alternative medicine to our services because it is becoming extremely popular."

According to the 2002 CARIBBEAN BUSINESS list of Top 300 locally owned companies, Pavia Health garnered $286.9 million in revenue in 2000, up from $249.76 in 1999.

HIMA’s Rodriguez explained that hospitals’ revenues increase every year because "there are more patients while the number of hospitals stays practically the same. Our emergency room receives twice the number of visits it was designed to accommodate. The Health Reform, which allows the indigent to visit the best hospitals, makes the situation even worse."

To alleviate the hospitals’ financial difficulties, HIMA has started offering them its new programs and services. HIMA, which has branches in Caguas and Humacao, is already selling a computer application it created in-house that helps in the billing process. "The program was developed with the assistance of and feedback from health insurer Triple-S Inc.," said Rodriguez.

HIMA is also perfecting its system for sterilizing hazardous waste. According to Rodriguez, it’s already being used at HIMA and will soon be available to other hospitals.

Rodriguez said HIMA’s revenue for both hospitals in 2001 was $95 million and he expects the figure to jump to $100 million this year.

The problem with Medicare

A letter Volckers sent to Sen. Robert Torricelli (D-N.J.) in Washington, D.C., in early August recounts the chilling effects of what many consider to be insufficient and unfair Medicare reimbursements to local hospitals.

"Hospitals in Puerto Rico are coming to the end of the barrel," wrote Volckers. "If Congress does not increase our reimbursement to at least a blended rate of 75%/25%, there is no way we can continue providing services to Medicare beneficiaries. If we continue with the same rates, we will all go bankrupt… We will always be grateful for your support of…legislation that will increase the blend from 50% to 100%."

As Volckers explained, "Medicare reimburses Puerto Rico hospitals only half of what it reimburses to U.S. mainland hospitals, even though we pay the same payroll taxes and comply with the same stringent regulations as they do. As a result, there is not one single Medicare case in which we turn a profit."

He further noted that the U.S. House of Representatives recently approved boosting to 75% the Medicare costs for which local hospitals will be reimbursed. However, the increase will be applied over five years and mainland U.S. hospitals get 100% back. "We need 100% reimbursements now," Volckers urged.

About half of the patients seen at local hospitals are Medicare beneficiaries, according to Volckers. "Pavia loses approximately $200 per day on each Medicare patient, and we’re in a crisis because of this," he said. "In fact, the Pavia hospital system is supported by the profits of our San Jorge Children’s Hospital, which is not burdened by Medicare reimbursement inequalities."

Prompt payment from insurers: myth or truth?

In July, Gov. Sila Calderon signed a law requiring health insurers to pay hospitals and providers that submit clean bills within 50 days. The law is expected to take effect by year’s end.

Pedro J. Gonzalez, executive director of Ashford Presbyterian Hospital, told CARIBBEAN BUSINESS that in the past year or so, he has noticed more health insurers paying promptly. Others, however, disagree.

"I’m a bit skeptical about the implementation of this law. For instance, how are we supposed to know what exactly is a clean bill? The law does not explain this, and insurers can have varying definitions of what a clean bill is," said Colon of Auxilio Mutuo.

Volckers agreed, saying, "Insurers still tend to pay in 90 to 120 days. They always look for an excuse to return bills because they are not clean. The problem with the recent law is that it does not say what a clean bill is."

Many hospitals and other providers have long complained that insurers tend to kick back bills which they’ve deemed erroneous (or unclean), delaying payments.

"Many insurers have demonstrated a genuine interest in paying diligently. Not all of them, though. Cruz Azul is one of those interested in doing a good job," said Colon.

Malpractice insurance, another headache for hospitals

The price of malpractice insurance has skyrocket each and every year, deeply affecting local hospitals’ operational budgets. "We have our own insurance and still, prices increase 60% to 80% every year," explained Eric Grafals, executive director of San Francisco Hospital.

"We have to keep $1 million in our insurance trust fund, as required by the Insurance Commissioner’s Office; we can’t let it go below that. In addition, we have to deposit about $100,000 into the fund every month to ensure that we can cover a malpractice claim, because we can’t use the $1 million for that," said Grafals.

Humberto Monserrate, executive director of San Pablo del Este Hospital, said his hospital is also self-insured. In his case, insurance costs increased a whopping 150% this year and he deposits around $130,000 every month into the trust fund, which also must always have $1 million.

"Of every four medical malpractice lawsuits, three are frivolous. To be more specific, only 23% of all medical malpractice lawsuits are won in court," explained HIMA’s Rodriguez, adding that every physician and every hospital in Puerto Rico is required to have malpractice insurance.

Grafals noted that in order to reduce the number of frivolous malpractice lawsuits, many U.S. states, California among them, now require a medical expert to give an opinion on a lawsuit before it can be taken to court. California’s government, he explained, is also limiting the allegations of moral damage and suffering, protagonists of many frivolous lawsuits. "Other states, as well as Puerto Rico, are trying to implement this."

Meanwhile, the number of insurance companies offering malpractice insurance has dwindled, which is why many hospitals have resorted to establishing their own insurance trust funds.

Northbound brain drain

For quite a while now, local hospital executives have been sounding the alarm about how increasingly difficult it has become to attract skilled employees to the industry. Juan Rivera, executive vice president of the Puerto Rico Hospital Association, told CARIBBEAN BUSINESS over a year ago, "Professional nurses are moving to the U.S. mainland, where they receive better pay." (2002 CB White Pages, p. 341).

Not only that, but some U.S. states, including Florida, are now accepting exam results from Puerto Rico (locally known as the revalida) for certification.

According to hospital executives interviewed by CARIBBEAN BUSINESS, the most desired health professionals are nurses and technical staff.

"This is like the question of what came first: the chicken or the egg?" explained Volckers. "We can’t retain employees because we can’t pay them a more attractive salary, and we can’t pay them a better salary because hospitals are not being paid adequately neither by Medicare nor by health insurers."

It is critical, he added, that hospitals’ labor unions see this big picture and understand that it’s why hospital administrations are unable to raise salaries. "They should join us in the fight to obtain better Medicare reimbursements and prompt payments from insurers," he said.

Despite all the obstacles, local hospital executives are determined to keep their hospitals afloat by running a cost-effective operation, offering good service, and diversifying their services. Sources in the local health industry assure that Puerto Rico’s hospitals are top-notch and can rival any comparable hospital on the U.S. mainland. It is not necessary to go to the U.S. mainland for most treatments anymore, said Rodriguez. "In fact," he added, "many of the top physicians in the States are Puerto Rican."

In the background, though, can still be heard the red alerts, calls for the desperately needed understanding and aid of the local and federal governments and of health insurers.

. Local Hospitals Remain Top-Notch Despite Difficulties


Sources in the hospital industry interviewed by CARIBBEAN BUSINESS have no doubt that local hospitals can meet or exceed the capabilities and expertise of any comparable hospital in the mainland U.S.

"We have nothing to envy of stateside hospitals. We have all the medical specialties and operate very efficiently," said Ivan Colon, administrator of Auxilio Mutuo Hospital.

"Puerto Rico’s hospitals are comparable to those in the U.S. mainland. We can offer the same services here," said Alfredo Volckers, executive vice president of Pavia Health.

Local physicians are of the same opinion, as evidenced by the responses they gave to the question which determined the winners of Buena Vida’s Hospital Choice Awards: "To which hospital would you go if you or someone dear to you had a medical emergency?"

The Doctor’s Choice Hospitals in Puerto Rico*

Hospital Medical specialization areas
Ashford Presbyterian Community Hospital Ob-Gyn
Cardiovascular Center of Puerto Rico and the Caribbean Cardiology, cardiovascular & thoracic surgery, and transplant surgery.
First Hospital Panamericano Adult and teenage psychiatry
Auxilio Mutuo Anesthesiology, transplant surgery, plastic & reconstructive surgery, general surgery, endocrinology, oncological gynecology, and neonatology, among others
Damas Hospital Adult and pediatric gastroenterology
Hospital de la Concepcion Neurosurgery
San Lucas Episcopal Hospital Thoracic and cardiovascular surgery
State Insurance Fund’s Industrial Hospital Burns
Pavia Hospital in Santurce Family medicine, nuclear medicine, pneumology, rheumatology, and oncological surgery, among others
Perea Hospital Adult and pediatric endocrinology
San Jorge Children’s Hospital Pediatric surgery, hematology/oncology, nephrology, emergency medicine, and more
San Pablo Hospital Hand surgery, gastrointestinal surgery, orthopedic surgery, general surgery, and many more
University Hospital for Adults Allergy and immunology
Las Americas Ambulatory Surgical Center Outpatient surgery
Centro Medico’s Emergency Room Emergency medicine, neurosurgery, and neurology

Banks Place Importance On Cost-Efficient Operations When Loaning Money To Hospitals

"As long as you can prove that you are running an efficient operation, banks will respond favorably," said Milton Cruz, CEO of San Pablo Health System.


To remain competitive, hospitals must constantly invest millions of dollars in the latest technology. To do that, however, they need banks to loan them money as most are strapped for cash because of dwindling profits. The key for getting banks to look favorably upon their loan applications is for hospitals to have cost-effective operations.

"Those hospitals that can show us that their operations are cost-efficient are the ones with whom we will work," said Raul Cacho, vice president of structured finance at Banco Popular. Jose Maldonado, assistant vice president of institutional banking at Banco Bilbao Vizcaya Argentaria, said some of the factors which banks consider in deciding whether to offer a hospital financing are the administration’s efficiency, the hospital’s capital structure and general conditions, and the collateral.

"In recent years, the financial situation of hospitals has been affected by increasing competition and by growing pressures from Medicare and health insurance companies. As a result, hospitals’ expenses are rising much faster than are profits," Cacho explained.

Cacho added that although Banco Popular continues loaning money to hospitals, he knows of other banking institutions that are not so willing to lend a helping hand. "Some are either not loaning to the hospital sector at all or are placing credit restrictions," he said.

Milton Cruz, CEO of San Pablo Health System, said his hospitals have had no problem obtaining financing despite stricter lending policies and incredible pressures on the industry, because his management team is focused on running a tight, cost-efficient operation.

"As long as you can prove that you are running an efficient operation, banks will respond favorably," said Cruz. He offered as an example San Pablo’s Central Business Office, which electronically centralizes the billing procedures of the three hospitals that are part of San Pablo. "This office helps us keep the number of billing errors to a minimum, which also helps insurers pay claims in a timelier manner, improving the hospitals’ cash flow," said Cruz.

This Caribbean Business article appears courtesy of Casiano Communications.
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