2010 was a return to the days of healthy profits for Ohio health systems and hospitals, which took a big hit from the recession just two years before.

Net income across about 180 hospitals in the state skyrocketed nearly 12-fold to $2.3 billion, compared with just $208 million in 2008. Profit margins also soared, to 7 percent in 2010 from 0.8 percent two years earlier.

(The financial numbers are taken from a report on the Ohio healthcare market by Allan Baumgarten, a health policy researcher in Minnesota.)

But of course, 2010 was a more profitable year for some than others, as the two lists below show. The first list, which measures sheer profits, won’t come as much of a surprise, with the state’s largest hospitals dominating. Ohio’s most celebrated hospital, the powerful Cleveland Clinic, tops the list.

The second list, which details the health systems with the highest profit margins, is a bit more interesting — if only for the big numbers. The top two performers enjoyed margins exceeding 20 percent.

While one year could obviously be an anomaly, such huge margins are striking, nonetheless. Hospitals typically average profit margins around 5 percent. The most profitable types of companies in the healthcare sector, big drug manufacturers, post profit margins of about 17 percent.

Any hospital that enjoys profit margins higher than Big Pharma should consider itself very fortunate.

Baumgarten obtained the data from Medicare cost reports from the U.S. Centers for Medicare & Medicaid Services (CMS). Note that the margins figure represents net income as a percentage of net patient revenues.

2010 profits
1. Cleveland Clinic    $535 million
2. OhioHealth (Columbus)    $233 million
3. University Hospitals (Cleveland)    $228 million
4. Tri Health (Cincinnati)    $106 million
5. Nationwide Children’s (Columbus)    $97 million
6. Miami Valley (Dayton)    $86 million
7. Cincinnati Children’s     $64 million
8. St. Rita’s (Lima)    $51 million
9. Kettering (Dayton)   $51 million
10. Akron’s Children    $46 million

2010 profit margins
1. Dayton Children’s Medical Center    22.0%
2. St. Luke’s (Maumee)    21.6%
3. Licking Memorial (Newark)    15.0%
4. St. Elizabeth (Boardman)    14.5%
5. OhioHealth (Columbus)    14.4%
6. St. Rita’s (Lima)    13.7%
7. Nationwide Children’s (Columbus)   12.8%
8. University Hospitals (Cleveland)    12.7%
9. Miami Valley (Dayton) 12.0%
10. Tri Health (Cincinnati)   11.3%

[Photo from Flickr user Images_of_Money]

The Minnesota Health Market Review  found that HMOs and county Medicaid plans garnered net income of $264 million, or 3.6 percent of operating revenue of $7.3 billion last year. Minnesota HMOs posted profits that were 3 percent of operating revenue only once.

Operating profits were $194.3 million, with an additional $69.8 million in investment income. Although enrollment in employer group plans continues to fall and has now dropped below 300,000, growth in Medicaid and Medicare plans more than offset those decreases.

At the end of 2010, Minnesota HMOs had combined capital of $1.64 billion, much larger than the amount they are required to have under state law. On average, they had capital equal to nearly three months of operation. In other words, even if no revenue came in, they could continue to pay claims and meet overhead for about  90 days. That is up from 2.4 months in 2009.

Individually, health insurance companies also had strong results. Blue Cross Blue Shield of Minnesota had net income after taxes of $100.1 million and Medica Insurance Company had net income of $44.1 million.

Minnesota health plans improved their profits on Medicaid plans, excluding  investment income from $119.5 million in 2009 to $170 million in 2010. State public programs (including the biggest ones — Medical Assistance and MinnesotaCare) accounted for about 46 percent of revenue, but 78 percent of health plan profits last year.

On average, HMOs collected $77 more in premiums from each state recipient per month than they paid out in medical expenses, although losses on MinnesotaCare offset a portion of that profit.

The Minnesota Health Market Review is published by Allan Baumgarten, an independent research consultant whose work focuses on healthcare policy, finance and local market strategies. He also publishes reports on seven other markets: Colorado, Florida, Illinois, Michigan, Ohio, Texas and Wisconsin.

The company warned Monday that an open-ended strike by 12,000 nurses belonging to the Minnesota Nurses Association (MNA) could damage the hospitals credit rating, making it harder and more expensive for hospitals to borrow money.

Given the tight credit market, a ratings cut could be potentially devastating to the cash-strapped hospitals who rely on lenders to finance everything from building new facilities to paying everyday bills.

“A long strike could have negative rating pressure on the hospitals who have striking nurses,” Moody’s analyst Sarah Vennekotter wrote in a report. “The cost of transporting, housing and training all those temporary nurses to replace the striking nurses could have a significant effect on their operating margin.”

“In addition, over the longer term, the provisions that the nurses union is asking for could also negatively affect the credit ratings with the salary increases they are proposing, involving changes to their benefit plan and the other provisions they are seeking,” she said.

With such thin margins, hospitals have little room for error. If expenses rose just 1 percent while revenue remained the same, the hospitals’ operating income could fall 24 percent, Vennekotter estimated.

Experts say a strike could force hospitals to consolidate. At the very least, non-union competitors like Hennepin County Medical Center or even the Mayo Clinic will pick up business as patients seek care elsewhere, said local healthcare analyst Allan Baumgarten.

With that said, there’s nothing to indicate the Minnesota Nurses Association’s threat to go nuclear — an open-ended strike — is a bluff. The union Friday filed the legally required 10-day notice to strike, a mere four days after nurses voted overwhelmingly to approve one. On July 6, nurses will walk — again.

And this after agreeing to returning to the bargaining table with the help of a federal mediator. Apparently, the nurses are getting a little impatient with the hospitals.

“Our nurses spent more than 13 hours today doing our best to stay hopeful about negotiations,” the MNA said in a statement. “Unfortunately, zero progress was made. Despite today’s setback, our nurses offered to return to the bargaining table again on Friday, Saturday, Sunday and every other day until a contract agreement can be reached. Instead, the Twin Cities Hospitals responded that the earliest they could meet would be sometime next week.”

“It has become beyond obvious to our nurses that the Twin Cities Hospitals, despite what they continue to say publicly, have no interest in meaningful or good faith negotiations. MNA had agreed not to file a 10-day strike notice if meaningful, productive negotiations were taking place”

Let’s be clear. A strike would be disastrous for all involved, the near equivalent of mutually assured destruction. But I’m going to make a bold prediction:

The nurses will not get what they want.

I say that because unlike wages and benefits, the MNA has staked this strike on winning mandatory nurse-to-patient ratios. With the arrival of the newly passed healthcare reform law, hospitals can’t afford to lock themselves into set work rules. So as much as a strike would hurt the hospitals financially in the short-term, ratios will hurt them far more in the unpredictable future.

Perhaps it would make more sense to strike over patient ratios in a good economy, but that’s not the case today. Yes, the California nurses won such legislation in 1998. But that was 12 years ago and a lot has changed. Hospitals today face dwindling volumes of paying patients, shrinking profit margins, reduced state aid and lower Medicare payments.

According to a recent report by healthcare analyst Allan Baumgarten, Allina, Fairview and HealthEast generated total net  income of $173 million in 2008, a 31 percent jump from the previous year. But throw in Methodist and North Memorial, both of which have suffered heavy operating losses, and Twin Cities hospitals have lost $3.9 million in the same period compared to a net income of $275 million.

My point is that nurses aren’t striking against just one hospital chain, the same way a union would strike against a Boeing or a General Motors. Twin Cities hospitals all vary in terms of financial strength and performance. So what incentive would the hospitals see in codifying ratios in a contract when they face vastly different financial challenges?

The nurses also won’t get the ratios because workplace rules are always a complex issue. The nurses can argue ratios guarantee patient safety, but those issues get harder to link as time passes and the public loses interest in the subject. Trust me, anything with the word “ratios” is bound to bore people whereas everyone can relate to paychecks and pensions.

Getting into a strike is easy. Getting out of one is lot harder because strikes are almost always about saving face for both parties. Neither the union nor the hospitals can really declare total victory. They certainly won’t declare total defeat.

The two sides can always work out something on wages and benefits. But ratios is a different story. Anything less would be a failure for the union, which, for better or worse, has hitched its wagon to this horse.

High unemployment, consumer pessimism, weakened employer insurance coverage and record government budget deficits — not to mention financial markets that have only partly recovered from a worldwide meltdown in late 2008 — caused Moody’s Investors Service to keep its “negative” outlook for non-profit hospitals in 2010, according to its annual sector report.

In 2008, the troubled economy hurt profitability and utilization/enrollment for both hospitals and health insurers in much of Ohio, according to the recently released Ohio Health Market Review 2009 report by Allan Baumgarten, an independent health care market analyst in Minnesota.

In the Cleveland area alone, hospitals recorded a $154.3 million loss in 2008, which represented 1.7 percent of patient revenues of nearly $9 billion, Baumgarten reported. That was down from 2007 net income of $809.9 million, or 10.4 percent of patient revenues.

At the same time, Moody’s gave its A2 rating — meaning upper-medium grade and subject to low credit risk — to $150 million in bonds issued by University Hospitals (UH) in mid-January.

And in a Tuesday RatingsDirect report, credit rating firm Standard & Poor’s assigned its A rating to $97.7 million in bonds the health system is selling to refinance past variable-rate debt at a fixed rate. Standard & Poor’s also affirmed its A rating on the health systems’ other bonds, giving the ratings a “stable” outlook.

The A rating means UH “has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories,” such as AA or AAA, according to the ratings firm.

Standard & Poor’s also gives some other health systems in Greater Cleveland high marks: Cleveland Clinic got an AA- in July. That’s a step higher than UH’s rating. And MetroHealth got a BBB+ — a step lower — in December.

“Overall, Standard & Poor’s is impressed with University Hospitals’ growth and has expressed confidence in our ability to continue achieving our operational goals,” Thomas F. Zenty III, UH’s chief executive, said in a statement.

“Of special note is that we achieved these results while growing our community benefit to $210 million in 2008, enhancing our investment in our physicians and clinical system-wide institutes, maintaining and improving our employee benefit packages, and expanding our operations in Northeast Ohio,” Zenty said.

In July, University Hospitals sold about $100 million in tax-exempt revenue bonds to complete external financing for construction projects that are part of its $1.2 billion strategic plan, called Vision 2010. The bond money will help complete the UH Ahuja Medical Center in Beachwood, and the UH Cancer Hospital and Center for Emergency Medicine at UH Case Medical Center in Cleveland, among other projects.

In its report, Standard & Poor’s said the emergency medicine center construction was delayed a year because of safety and work-flow issues at UH’s main campus, so it won’t open until 2011. Ahuja and a cancer hospital being built at the main campus are 35 percent complete and slated to open next year, according the report.

Last year, the health system completed a neonatal intensive care unit at UH Rainbow Babies & Children’s Hospital in Cleveland and UH Concord Health Center, among other projects, as part of its  strategic plan. The short-term bonds will be used to repay existing debt, the health system said.

The growth springs from an operational turnaround under Zenty, who arrived in 2003. A year later, University Hospitals reported its first operating profit in 11 years, thanks in part to Zenty’s decisions to cut jobs, close a money-losing hospital, sell a psychiatric facility and exit the health insurance business.

In early December, UH streamlined its clinical and non-clinical operations and brought in some new faces to lead continued growth during a period that Chief Operating Officer Dr. Achilles Demetriou said would bring unprecedented challenges to his industry.

Standard & Poor’s was positive on University Hospitals because in the first nine months of 2009 it had:

• A “good” operating margin of 4.8 percent, as well as 3.8 times the cash it needed to cover debt
• Stable patient utilization, with discharges up 0.5 percent
• Managers who focused on delivering quality health care at the same time they worked through a major capital spending program in a troubled economy

S&P didn’t like UH’s:

• Higher-than-average debt level
• Continued spending on Vision 2010 building, which could weaken the balance sheet
• Only 134 days’ worth of cash on hand

“The stable outlook reflects our opinion that UH management will continue to operate at the existing level,” S&P said in its report. “Although 2010 will be a challenge as more costs come online with the opening of facilities associated with Vision 2010, we expect that management will be able to meet its operating goal. And though Vision 2010 was over budget, management has adjusted its current routine capital to cover the shortfall in the budget.”

The credit ratings firm also threw in this caveat: “However, if fiscal 2010 operations or the balance sheet ratios are worse than expected, then an outlook or rating change is possible.”