Tucson may be in better shape than many urban areas when it comes to the financial health of its hospitals.

A recent analysis concluded that more than half of the acute-care hospitals in the United States — most of them in urban areas — are broke or at risk of going broke. A major culprit is too much competition, said George Pillari, managing director of Alvarez & Marsal’s Healthcare Industry Group, which did the study. Alvarez & Marsal is a global professional-services firm with an office in Phoenix.

Most of Tucson’s hospitals are profitable, and the market here appears to have avoided the overbuilding and overbedding situation that has spurred such intense and financially disastrous competition elsewhere.

"Many times you have a teaching hospital or a dominant provider; sometimes there’s a strong number-two hospital and then everybody else is fighting for patients," Pillari said. "A lot of hospitals are specializing — going to psychiatric care, for example — and specializing where they can attract patients."

The analysis found that more than 2,000 of the nation’s 4,900 acute-care hospitals don’t make a profit treating patients and must rely on alternate and generally unstable sources of funding, including government subsidies and donations.

And even many of the hospitals classified as "profitable" still can’t generate enough cash to fund essential, nondiscretionary capital expenses needed to comply with regulations and/or remain competitive with increasingly dominant academic medical centers, Alvarez & Marsal found. 

Furthermore, the analysis found that capital expenses in the industry are underfunded by $10 billion to $20 billion, mainly because capital dollars are being diverted to fund operations.

Several factors are important in determining a hospital’s success, Pillari said. One is occupancy rates — usually, the fuller a hospital stays, the better off it is. Like airlines, hospitals that are only half full still must pay utilities, buy expensive equipment, hire staff and maintain facilities.

Most of Tucson’s hospitals fare well in this category. Data available from the Arizona Department of Health Services’ Bureau of Public Health Statistics in Phoenix showed high occupancy rates at Tucson hospitals in 2007: 84 percent at Carondelet’s St. Joseph’s Hospital, 62.9 percent at Carondelet’s St. Mary’s Hospital, 83.9 percent at University Medical Center (UMC), and 62 percent at University Physicians Hospital (UPH). Northwest Medical Center’s rate is 84 percent and Northwest Medical Center Oro Valley, which has only been in operation since 2005, already has a 73 percent occupancy rate. The rate at Tucson Medical Center is over 90 percent, according to Mike Letson of TMC’s communications team.

One might assume that hospitals in fast-growing Sunbelt cities are better off than those in Rustbelt cities, but Pillari said both have their challenges. Patients in Rustbelt cities often have rich union benefit packages that pay well, while Sunbelt cities often have retirees on Medicare, but also face the challenge of supporting care for undocumented immigrants who are more plentiful in those states.

"It’s a big impact," Pillari said. "People talk about the uninsured, but they still get care. A hospital has to absorb it and they get treated." In the Southwest, Pillari said, the problem is acute — sometimes 10 to 15 percent of all patients. "The uninsured and underinsured can really cripple a hospital," he said. "And that happens in a lot of places — a lot of times people wind up at county hospitals and a government entity has to shell out millions."

For example, a 2002 study done by MGT of America for the United States/Mexico Border Counties Coalition revealed that out of net patient revenues of $704 million in Pima County, more than 10 percent — $75.9 million — was uncompensated care and $24.7 million could be attributed to uncompensated care provided to undocumented immigrants. According to that study, Pima County received about $7.2 million in federal "disproportionate care payments" — payments to hospitals that treat a disproportionately high share of low-income patients — in 2000.

Despite these challenges, most area hospitals have done fairly well financially. Figures from the state Bureau of Public Health Statistics showed 2007 net income (profit) of $19.7 million for St. Joseph’s, $24.1 million for St. Mary’s, and $16 million for UMC.

The only Tucson-area facility that was a big money loser in the state’s 2007 report was UPH, which lost $16.9 million. But UPH has a special set of circumstances that help explain the loss (see story below).

The Arizona Department of Health Services didn’t have 2007 income reports for Northwest Medical Center (NMC) or NMC at Oro Valley, but its 2006 report showed operating income of $10.9 million for NMC and a loss of $2.45 million for the Oro Valley site in its second year of operation.

Both NMC and its Oro Valley counterpart are part of the Community Health Systems Inc. national chain, which reported overall income of $59.9 million in 2007. Paul Kappelman, CEO of NMC, said the chain doesn’t talk about the profitability of individual hospitals, but he confirmed that both the Tucson hospitals were profitable in 2007.

TMC recently reported a dramatic financial turnaround after taking a number of measures to stem losses there. The hospital finished 2007 with a $5.3 million loss, but its performance improved in the last half of that year, keeping losses lower than they might have been, according to Letson. He said 2008 figures through May show the hospital $11.3 million in the black so far, although summer months are often down months for Tucson hospitals.

TMC’s profitability began to improve after it decided to leave about 150 nonmedical jobs unfilled, cut another 300 mostly nonmedical positions, renegotiated supply costs and restructured some debt.

Contact reporter Ed Egger at eegger@azbiz.com or (520) 295-4238.