As children's hospitals expand, costs and questions rise, too

Kaiser Health NewsSeptember 25, 2011 

WASHINGTON — Rising from a 60-acre field of old cypress swamp and cattle pasture near the Orlando airport, the seven-story Nemours Children's Hospital will be a monument to "best-in-class" care, its leaders boast.

That may be the case. But at a cost of about $400 million, the equivalent of $4.2 million for each of its 95 beds, Nemours also will rank among the more expensive children's hospitals ever built when it is completed next year. Some people believe construction never should have begun.

Florida health planners twice rejected Nemours' applications for a new hospital, noting that Orlando already had two children's hospitals; most cities have only one. A third hospital could duplicate existing services, driving up costs for insurers, employers and policyholders.

The regulators reversed themselves in 2008, however, after Nemours, a wealthy Jacksonville-based foundation, mounted an extensive marketing campaign and lined up scores or politicians and civic boosters, including former Gov. Jeb Bush.

"It's a case of excess here in Orlando," said Becky Cherney, until recently the head of the Florida Health Care Coalition, a statewide business group concerned about the impact of rising health spending. "We don't have anything against Nemours. But central Florida doesn't need another children's hospital."

The battle over Nemours reflects the transformation of children's hospitals from small, struggling charities to huge, often profitable businesses. From their humble origins more than a century ago, many of the nation's biggest and best-known children's hospitals today are health care juggernauts with sprawling medical centers and suburban satellites, extensive real estate holdings, thousands of well-paid employees and millionaire CEOs.

The billions of dollars flowing through children's hospitals every year pay for care for tens of thousands of kids, many of them extremely sick or suffering from chronic conditions requiring a lifetime of treatment. Hospital officials say costs are high because the care is complicated and the technology expensive. In addition, the hospitals help fund research into the causes and treatment of diseases.

But the surge in spending also is helping to fuel a multibillion-dollar building boom as hospitals add towers and beds. That in turn is spurring more spending on staff and technology, even as Washington, the states and employers grapple with budget-busting increases in health care spending. While children's hospitals represent a small slice of the nation's health care bill, they offer a case study of the expansive ambitions of hospital leaders and the faltering efforts of government to control spiraling costs.

The government heavily subsidizes the care of children from low-income families with Medicaid and the Children's Health Insurance Program, and also provides nonprofit children's hospitals with significant tax breaks that help them fund their growth. Private employers and their workers pay most of the rest of the bill for kids' care through health insurance. When a new hospital like Nemours is built or another expands, taxpayers and private insurance policyholders pick up the tab down the road.

Over the past year, Kaiser Health News examined the business of children's hospitals, interviewing experts and hospital officials and inspecting a variety of records, including the hospitals' publicly available federal tax returns and bond documents filed in the course of borrowing money for expansion.

Some hospitals refused to answer questions, and the documents fell short of providing a complete financial picture. One of the frustrating obstacles confronting independent analysts is the lack of transparency in the hospital industry, including facilities that serve adults. There aren't reliable comparative measures of quality or finances. And, with few exceptions, the prices hospitals charge insurers for care are closely guarded secrets.

Many of the approximately 220 children's hospitals nationwide are part of large adult health systems, and details of their finances aren't public. Some are large and well known, such as the 455-bed Riley Hospital for Children in Indianapolis, part of Indiana University Health, and the Johns Hopkins Children's Center in Baltimore, which expects to open a new 205-bed hospital next year.

Kaiser Health News' examination focused on the nation's 39 largest independent children's hospitals. They are viewed within the industry as elite providers. All are nonprofit. But the financial performance of some would be the envy of for-profit companies, public tax returns show.

The big, freestanding children's hospitals generally have a huge advantage in the marketplace: They face little competition and provide an essential service, giving them leverage to negotiate favorable prices with health insurers. At some, charges have risen sharply, increasing two to three times inflation, records and interviews show. That has encouraged aggressive expansion and spending on new facilities, costly technology and executive pay.

"The elite children's hospitals don't compete on price," said Jerry Katz, a former CEO of St. Christopher's Hospital for Children in Philadelphia. "They compete for prestige. What that means is they are competing for the top docs and researchers, the top programs."

To be sure, not all children's hospitals make big profits; some struggle to break even. In 2009, the elite children's hospitals reported $1.5 billion in profits — what nonprofits call surpluses. The top 10 alone earned more than $800 million in profits. Children's Hospital of Philadelphia reported a $197 million surplus and paid its CEO nearly $2.1 million.

In 2009, most CEOs at the nation's largest children's hospitals were paid $1 million or more, public tax returns show. Randall L. O'Donnell, CEO of Children's Mercy Hospitals and Clinics in Kansas City, Mo., led the list at almost $6 million, including a special retirement payout of $4.1 million. Five other CEOs collected more than $2 million. Many of the executives received hefty bonuses, country club memberships, cars or other perks.

CEOs say their pay packages are warranted by the responsibilities of running large, complicated businesses — charities or not. Under O'Donnell's leadership, Children's Mercy grew from a small, local hospital to a regional and "national destination," said spokesman David Oliver. Children's Hospital of Philadelphia doubled in size, to an estimated $1.8 billion in annual revenue, under CEO Steven M. Altschuler.

The pay packages of children's hospital executives compare favorably to CEO compensation at the nation's biggest and best-known adult hospitals, record show. The head of the Cleveland Clinic, with more than $5 billion annually in revenue, received $2.1 million in 2009. The head of the Mayo Clinic parent group: nearly $2.2 million.

As nonprofits, children's hospitals enjoy an array of tax breaks covering real estate, earnings and investment gains. Spokesmen say this allows them to act as safety-net providers for the poor. It also helps them boost their reserves and grow the business.

The 39 largest hospitals, Kaiser Health News found, had accumulated $20 billion in stocks, bonds, real estate and other investments as of 2010 — nearly enough to provide an entire year's worth of medical care for free. They had net assets — the equivalent of net worth for non-profits — of $23 billion.

Children's Hospital Boston, arguably the nation's best-known hospital for children, listed $2.6 billion in stocks and other investments in bond filings.

Last year, the 400-bed hospital was cited as having some of the highest charges in Massachusetts in a report critical of hospital expenses filed by state Attorney General Martha Coakley. Hospital officials declined numerous requests for an interview but noted on their website that they have lowered the rate of their increases.

Even with their tax breaks and wealth, top children's hospitals provide relatively little charity care. On average, about 2 percent of what children's hospitals spend is for free medical care, according to the National Association of Children's Hospitals and Related Institutions, an industry group. Some of the largest and richest children's hospitals spend less than 1 percent.

The American Hospital Association does not break out what its more than 5,000 members, mainly adult hospitals, spend annually on charity care. In 2009, the association said its hospitals provided $39.1 billion in uncompensated care, which includes bad debt as well as charity care.

In 2009, less than one-half of 1 percent of Texas Children's Hospital's spending went to charity care, according to its tax return. The 639-bed Houston hospital reported $1 billion in revenue and $1.9 billion in cash and investments that year. It spent $4.3 million on free care.

In an email, a spokeswoman noted that Texas Children's used more than $80 million of its own money to fund research, teaching and other community-based initiatives as part of its charitable mission. Other children's hospitals point to clinics and public health programs as examples of their community outreach. They say those efforts exceed the value of their tax exemptions.

Taxpayers also are helping to underwrite a race to the top among the nation's largest children's hospitals, subsidizing billions in tax-exempt bonds for new hospital towers, outpatient centers, parking garages and research facilities. Nemours is funding $300 million of its new hospital with tax-exempt bonds.

The Nemours project is part of a nationwide construction boom involving children's hospitals. In the last decade, children's hospitals have spent at least $15 billion on expansions, bond filings and other records show. Children's Hospital of Philadelphia spent $1 billion and says it expects to spend another billion in coming years. At $625 million, the new Childrens Hospital of Pittsburgh cost more than the combined price tag of PNC Park and Heinz Field, home to the Pirates and Steelers. Children's Memorial Hospital in Chicago is spending $915 million on a new facility — the equivalent of $3.1 million per bed.

In metropolitan Denver, the major children's hospital has expanded not once but twice in the last five years. In 2007, Denver Children's, now known as Children's Hospital Colorado, opened a $650 million hospital in the suburbs. It is now adding a $230-million, 10-story expansion.

"We were probably as surprised as you that we would need space so soon after moving into our new facility," explained Colorado CEO Jim Shmerling, but demand has risen by 35 percent. "You always wonder with new construction like we have, will it continue? Well, indeed it has."

Shmerling pointed to several factors spurring the increase in demand, including the lure of a bright new facility and a growing population of children. The hospital also has experienced a bump in referrals from outside the state — about 12 percent of all admissions. At the same time, advances in pediatric medicine have cut mortality rates for some childhood diseases.

"We used to see mortality of 90 percent for some cancers. Now we see survival rates of 90 percent," Shmerling said. But survivors require lots of care, including tests, chemotherapy and other procedures, which he said "have them coming back to the hospital."

While overall pediatric admissions have declined about 15 percent in the last decade, they have climbed at independent children's hospitals. One reason is that as community hospitals close small pediatric units, those patients are steered elsewhere. Children's hospitals also are extending their reach into the suburbs, other states and even other countries.

Larry A. McAndrews, until last week the head of the National Association of Children's Hospitals and Related Institutions, said many children's hospitals are also expanding their research efforts. Others are replacing outdated facilities. Yet even in states with declining children's populations, including Ohio and California, billions in new spending is taking place.

Like other businesses, children's hospitals have their own unique brands, missions and ambitions. "Part of it is we are part of a competitive, capitalistic model," said McAndrews. "In this country we want to build a facility that is bigger and better."

Some of the spending, hospital officials say, reflects their unique needs. The typical patient's room is larger than an adult room in order to accommodate more technology and parents who sleep over. Urban construction costs also tend to be higher because of pricey real estate and space constrictions. Children's Memorial officials in Chicago pointed out that building their new 23-story hospital on a "relatively small parcel of land" has posed special challenges, including installing two separate banks of elevators between lower and upper floors.

There are other reasons for high costs. Many of the new hospitals are architectural showcases. They feature atriums, rooftop gardens, indoor playgrounds, flat-panel televisions, on-demand movies and video games and work stations for parents, among other amenities.

Martin Gaynor, an economist at Carnegie Mellon University who has written extensively about hospital spending, says he was stunned when he toured the new Pittsburgh hospital.

"I couldn't believe it," he said. "It's a beautiful, beautiful facility. It's a very nice facility for the families and kids.

"It's a very awkward question to ask," Gaynor added, "but at some point one wonders just how nice does this have to be?"

(Kaiser Health News is an editorially independent program of the Henry J. Kaiser Family Foundation, a nonprofit, nonpartisan health policy research and communication organization not affiliated with Kaiser Permanente.)

ON THE WEB

Boston Children's Hospital bond documents

American Hospital Association study on uncompensated hospital care

Nemours Children's Hospital bond documents

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