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The plan to end acute care at Our Lady of Victory Hospital coincided last week with the release of a new audit of New York State's hospital industry.

The state figures showed hospitals earned record profits in 1997 in every major metropolitan area but one -- Western New York.

As one local executive put it, "our hospitals are having a quiet crisis."

The losses explain why the Catholic Health System decided to consolidate services at OLV in Lackawanna and Mercy Hospital in South Buffalo, a decision that disappointed employees and residents.

The losses in the audit also explain why other longtime community institutions are merging, laying off employees and changing what they do. Just last week Lockport Memorial Hospital went through another round of job cuts since December.

Before the new year, Kaleida Health stopped delivering babies at Buffalo General Hospital and concentrated maternity services at Millard Fillmore Suburban and Children's hospitals.

Despite the rosy picture state officials painted, this region's hospitals remain under huge financial pressure to cut costs quickly.

"If you think the 1997 numbers are bad, wait until you see the numbers for 1998," said William Pike, president of the Western New York Healthcare Association. "They're going to be worse."

What happened at OLV is only the start.

The Catholic Health System has reported it will next reorganize its northern suburban hospitals, including Kenmore Mercy and St. Joseph in Cheektowaga.

Kaleida Health, the largest health network in the region with Buffalo General, Millard Fillmore, Children's and DeGraff Memorial hospitals, has yet to announce the major elements of its plan to consolidate medical programs. The two hospitals in Batavia, one private and the other Catholic, are working out a controversial affiliation, raising fears about future availability of reproductive services that go against church stances.

And in Niagara Falls, residents turned back efforts to move acute care from the city's Niagara Falls Memorial Medical Center to Lewiston's Mount St. Mary's Hospital.

But officials warn that it is impossible to maintain two full-service hospitals much longer.

"At the same time that we're reducing expenses, we're seeing a decline in patients admitted to the hospital. It's a constant race to cut costs to keep up with falling revenue," said Angelo Calbone, president and chief executive officer of the Health System of Niagara.

Here's the problem: There's less demand for the product that hospitals sell. Patients don't have to stay in the hospital as often or as long because of medical advances.

Meanwhile, HMOs and government programs, such as Medicare for the elderly, have cut payments.

As in any business, no safety net exists to save hospitals that can't find new ways to make more money or to cut expenses.

Hospitals nationwide have closed their doors or eliminated services. Hundreds of others have merged to get rid of duplicative management and support staff, and medical programs.

Like a storm sweeping across the country, the fiercest gales in the downsizing of the hospital industry have hit the Buffalo area.

"We have to downsize, otherwise quality will suffer," said Pike. "We have a health system now with too few employees but far more hospital beds than we need."

Poor performance

The state Health Department released the positive hospital data a few days before Gov. Pataki proposed large cuts in the state's share of Medicaid expenses. Medicaid, the government health program for the poor, constitutes a large slice of hospital revenues.

"Clearly, this is unwise and unnecessary. The cuts will have a disproportionate impact in a city like Buffalo, with its large population of Medicaid patients and teaching hospitals dependent on support from the program," said Daniel Sisto, president of the Healthcare Association of New York State.

The new audit reported the state's hospitals posted profits or surpluses of $739 million in 1997. That's up 42 percent from 1996.

The 1997 data, the most recent available, shows the first full year since the state stopped setting hospital charges and allowed hospitals to negotiate rates with insurers.

Sisto's group, which represents several hundred hospitals in New York, contends the state inflated hospital figures by factoring in endowment funds and tax subsidies.

In this region, it doesn't matter.

Western New York performed poorly any way you look at it. Fifteen of 26 hospitals -- information for three hospitals was not available -- posted operating losses.

Niagara Falls Memorial Medical Center showed the worst situation -- a $16.1 million loss on revenues of $48 million.

Even hospitals that made money, didn't make much. For the most part, operating profit margins hovered below 2 percent.

Economic reasons

Hospitals here have survived with empty beds for years. It was health insurers and the government that finally forced the issue.

With so many hospitals in the region hungry for patients, HMOs have effectively played one against another to lower payments.

In this region, insurance premiums have sunk below the state average. Hospital executives see this as evidence the rates hospitals receive for services from health insurers do not reflect actual costs.

Congress in 1997 cut Medicare payments over five years, with the largest reductions coming in later years. Hospitals depend heavily on Medicare patients, the federal health program for the elderly.

Pike estimated hospitals here will receive $46 million less in Medicare payments in 1999 and $59 million less in 2000.

Now, Gov. Pataki wants to reduce Medicaid payments.

"We saw the cuts coming in programs like Medicare and Medicaid," said Dale St. Arnold, president and chief executive officer of the Catholic Health System. "What's happening with the economic forces is not going to stabilize. It's going to get worse."

The Catholic Health System last week decided to consolidate acute care at Mercy and concentrate other medical services OLV, including rehabilitation.

The move will result in lay offs and the transfer of workers to new positions.

The trouble for hospital administrators is that, for the most part, they have already made the easier cost cuts -- positions in middle management, nursing, maintenance and support staff.

"Many aspects of medical care -- an emergency room, for example -- come with fixed expenses and levels of staffing that can't be reduced beyond a certain point," said Calbone.

Unless new sources of revenue are found, once that point is reached, he and others said hospitals can only reduce expenses by eliminating medical programs or consolidating with other hospitals.

HMO relationships

Niagara Falls Memorial lost nearly $4 million in 1996 and is estimated to have lost $10 million in 1998. The hospital also is precariously close to the limit on a line of credit provided by the Daughters of Charity, the religious order that owns Mount St. Mary's.

It's not alone.

Other hospitals listed in the state report that lost money on operations in 1997 included Our Lady of Victory in Lackawanna, $4.9 million; Sisters, $5.7 million; Mercy, $2 million; Sheehan Memorial, $1.2 million, and DeGraff Memorial in North Tonawanda, $3.5 million.

These hospitals must find new revenue or cut costs, executives said. It's that simple, but not easily accomplished.

Calbone and others say hospitals can no longer raise prices to increase revenue. There's too much competition.

For Calbone in Niagara Falls, consolidation is no longer an option. Yet he argues that the two hospitals he oversees cannot remain the same and survive.

"In the past, every hospital could be all things to all people," he said. "This has been an emotional issue here. But the reality is that we can no longer support two traditional, full-service hospitals in the long-term anymore."

Red ink

Hospitals are not money-makers in this area.

Western New York $8.7 million loss
Long Island $119.3 million profit
New York City $337 million profit
Syracuse-area $51 million profit
Rochester-area $55 million profit
SOURCE: NYS Health Department

Hospital check-up

The 1997 financial report on area hospitals

Who lost money Loss on operations Net patient revenues
Niagara Falls Memorial $ 16.1 million $48.0 million
Sisters Hospital 5.7 million 92.6 million
Our Lady of Victory 4.9 million 43.3 million
DeGraff Memorial 3.5 million 34.2 million
Mercy Hospital 2.0 million 107.2 million
Kenmore Mercy Hospital 1.7 million 64.3 million
Sheehan Memorial 1.2 million 23.9 million
St. Joseph Hospital 931,551 42.4 million
Westfield Memorial 908,355 6.4 million
Tri-County Memorial 744,849 11.3 million
Lake Shore Hospital 537,458 23.1 million
Bertrand Chaffee Hospital 467,080 10.9 million
Lockport Memorial 399,052 34.5 million
Brooks Memorial 389,451 25.1 million
Olean General Hospital 267,574 44.3 million

Who made money Operations surplus Net patient revenues
Children's Hospital $ 1.6 million $92.2 million
Buffalo General 1.4 million 275.6 million
Erie County Medical Center 1.3 million 247.7 million
Medina Memorial 954,850 22.2 million
Millard Filmore Hospital 816,000 241.0 million
Genesee Memorial 475,412 24.7 million
WCA Hospital 196,047 74.6 million
Wyoming County Hospital 128,318 30.4 million
St. Jerome Hospital 75,260 20.9 million
Inter-Community Memorial 57,187 14.2 million
Jones Memorial 19,908 20.0 million

NOTE: Figures based on income or losses from operations and not from unrestricted net assets. Data unavailable for Cuba Memorial, Mount St. Mary's and Roswell Park Cancer Institute.

SOURCE: New York State Health Department

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