Aurora gets heavy dose of skepticism

Non-profit touts coordinated care as others decry prices

Milwaukee Journal Sentinel, June 11, 2006

By GUY BOULTON
gboulton@journalsentinel.com

The five-year fight over Aurora Health Care Inc.'s proposed hospital in Waukesha County has become a referendum of sorts on the state's largest health care system.

Aurora's proposal is rooted partly in business and partly in how it sees its mission as a non-profit organization. For that reason, it invites conflict.

To Aurora, owning a hospital in Waukesha County is key to an integrated health care system that it sees as the best and most cost-effective way to provide quality care. It wants all of its patients, including the 40,000 in western Waukesha County, to benefit from that.

To critics, Aurora is loath to leave a lucrative and fast-growing market in its backyard to a competitor. Despite the pressure on health care systems to control costs, it is willing to spend at least $166 million to ensure that doesn't happen.

But for consumers, the proposed hospital is secondary to bigger questions: Has Aurora created a health care system that provides better quality care at a lower cost? Or does its ambitious expansion have more to do with market share and money than with making the health care system work better?

For nearly two decades, Aurora has steadily expanded, merging with other hospitals, buying or opening family-practice clinics, building a network of pharmacies and opening hospitals in new markets.

Along the way, it has built a health care system with 13 hospitals, 25,000 employees and $2.8 billion in revenue last year. Since 1999, it has built new hospitals in Kenosha, Two Rivers, Green Bay and Oshkosh.

The remaining hospital on its wish list is the one slated for Waukesha County.

That hospital has sparked a costly and contentious fight, one in which Aurora - a tax-exempt organization that by law must be run for the public benefit - sued Oconomowoc and Waukesha County. A court ruling last month in one of those lawsuits may finally clear the way for construction.

Aurora's stated goal is to create a health care system that can coordinate care across clinics, hospitals and pharmacies, thereby reducing waste and improving quality.

"We've been involved in the task of actually reinventing how health care is delivered," said Ed Howe, Aurora's president and chief executive.

Making the health care system more efficient is a common reason cited for the wave of hospital mergers and acquisitions that transformed health care in the 1990s.

Yet national studies have found no evidence that the expansion of health care systems has improved quality or increased efficiency.

What the studies have found is that it gives health care systems more bargaining power when negotiating rates with health plans - costs ultimately passed on to employers, who in turn pass them on to employees.

"If we see anything, we see price increases," said Alison Evans Cuellar, a professor of health policy and management at Columbia University.

That was the conclusion of a study by Cuellar and a co-author published this year in Health Affairs, a policy journal.

Limited information is publicly available on hospital costs and quality. But the study's findings aren't isolated.

An overview of the research on hospital mergers and acquisitions found that they raised hospital prices by at least 5% and perhaps significantly more, according to a policy brief released in February by the Synthesis Project, which summarizes health policy research.

Further, integrated health care systems, to varying degrees, are now the norm in the Milwaukee area. So far, the result hasn't been lower health care costs. It has been the opposite.

One study has found that health care costs in the Milwaukee area are 39% higher than other Midwestern cities. And a study by the Government Accountability Office found that the Milwaukee area has the 22nd-highest health care costs in the country and the fifth-highest hospital costs.

For certain, Aurora's expansion has yet to yield huge profits. Last year, Aurora had net income of $42.5 million on revenue of $2.8 billion, up from $31.8 million on revenue of $2.6 billion in 2004.

This gave Aurora a net profit margin of 1.5% in 2005. Its operating margin - which excluded losses on certain investments - was slightly higher at 1.8% but still below the industry goal of 3% to 6%.

The expansion also has saddled Aurora with $1.2 billion in long-term debt.

But Brian T. Williamson, a bond analyst with Standard & Poor's, said Aurora has gone through its major building phase.

"They are starting to reap the benefits from all the hospitals they have built over time," he said.

Information filed with the Wisconsin Hospital Association supports that.

Aurora's hospital in Kenosha, built in 1999, had one of the best profit margins of any in the system in 2005. And its hospital in Green Bay, a joint venture with a physician group, has begun generating strong profits.

The question is whether those profits will result in lower health care costs.

"Our anticipation is that we in fact will have the lowest cost structure as a result of the things we are doing and putting together," Howe said.
Aurora also puts its faith in competition to lower health care costs and improve quality. This is one of its core arguments for building a hospital that could compete with Oconomowoc Memorial and Waukesha Memorial, both owned by ProHealth Care Inc., in western Waukesha County.

Others hold the same view on competition.

A senior vice president of health insurer UnitedHealthcare, for instance, appeared before the Waukesha County Board last year on Aurora's behalf, contending that competition in health care works as in any business.

That seems logical - at least at first glance. But given the way the health care marketplace works, competition in health care doesn't necessarily mean price competition.

"It doesn't happen by default," said Brian Jensen, a benefits consultant with Aon Consulting.

For one thing, Aurora doesn't have to offer better prices to gain market share when it enters a new market. That's because health care systems typically negotiate systemwide contracts.

In other words, if a health plan wants to include Aurora's Milwaukee hospitals in its network, it also must include its hospitals in Green Bay or Oshkosh or, potentially, Waukesha County.

This presumably gives Aurora less incentive to compete on price because it knows a new hospital will be included in most large health plans.

Aurora's contracts go further: They generally require Aurora hospitals to be included in every health plan offered by an insurer or administrator.

This requirement - which Aurora acknowledges is typical for its contract - is at the core of an antitrust lawsuit filed this year against Aurora by Wisconsin Physicians Service Insurance Corp.

The lawsuit alleges that Aurora has used its market power in Milwaukee - where it is hard to offer a competitive health plan that doesn't include Aurora St. Luke's Medical Center - to require that all of its hospitals be included in every health plan.

WPS contends that Aurora's hospitals have higher costs than their competitors. And it alleges that this tactic prevents large insurers in eastern Wisconsin from offering less costly health plans that offer smaller networks or that don't include Aurora hospitals in markets where it has less sway.

Howe disputes this.

He noted that Aurora in the past year signed contracts with UnitedHealthcare and, with the health plan, put together a coalition that includes some of the area's largest employers.

"If our prices weren't good," he said, "they wouldn't have contracted with us."

ProHealth - perhaps not surprisingly - also contends that Aurora's costs are higher than other hospitals.

Ford Titus, ProHealth's chief executive, said surveys show its hospitals' costs for common treatments are consistently among the lowest in the Milwaukee area while Aurora's hospitals are near the top.

"The market currently does not reward lower prices," Titus said.

Aurora also eases its entry into new markets by buying or aligning with a physician group first. This gives it a referral base once it builds a hospital.

Here's how it works: Most patients go to specialists recommended by their doctor. And doctors who work for a health care system generally refer patients to specialists who practice at hospitals owned by the health care system.

The clinics typically lose money - or at best break even.

"Most clinics are loss leaders to bring in the patients," said Williamson, the S&P analyst.

ProHealth, for example, loses money on its clinics.

Jeff Squire, an Aurora spokesman, would not comment on whether its clinics, including the Wilkinson Clinic in western Waukesha County, lose money.

But Aurora apparently is no different - its hospitals reported net income of more than four times the net income for the entire system.

Titus said he can understand Aurora's desire to keep its 40,000 patients at the Wilkinson Clinic within its system and not refer them to a ProHealth hospital.

To him, that is a separate issue from whether western Waukesha County needs an Aurora hospital roughly three miles from a ProHealth hospital in Oconomowoc.

"This is about a corporate strategy," Titus said. "That's all it's ever been about."

For certain, Waukesha County - an affluent community with a relatively small number of people who are enrolled in Medicaid or uninsured - is one of the most lucrative markets in eastern Wisconsin.

That can be seen in the profits of ProHealth, which reported net income of $32.9 million on revenue of $520.5 million last year, giving it a 6.3% profit margin. That's more than four times Aurora's net profit margin.

In 2004, ProHealth's margin was even higher - 10%.

Aurora acknowledges Waukesha County's allure.

"It's a rapidly growing market, and it has a wonderful payer mix," Howe said.

Yet at the same time that Aurora wants to build a $166 million hospital in an affluent suburban community, it has taken steps to limit the number of Medicaid patients that its doctors in Milwaukee can accept.

That has generated criticism. So, too, has Howe's annual compensation of almost $2.9 million in 2004, down from $3.2 million in 2003. Numbers for 2005 were not available.

Howe said Aurora needs profits from its affluent markets to subsidize its unprofitable operations, such as Aurora Sinai Medical Center in downtown Milwaukee; the cost of treating Medicaid patients; and its support of community programs.

These include support for free clinics, community health centers, school clinics and other programs.

"The reason we exist is not to make as much money as possible," Howe said.

If Aurora had an unchallenged reputation for providing better quality at a lower cost than its competitors, the opposition to its proposed hospital probably would be much more muted. But little public information exists on prices. And standard measures of quality are only beginning to emerge.

Further, much has changed since 2001 when Aurora first proposed building a hospital in Waukesha County.

The cost of health insurance for employers has risen more than 70% nationally. And employers are putting more pressure on health care systems to improve quality care and lower costs.

Yet five years after first proposing the hospital, Aurora remains resolute, convinced that its integrated system can provide better care and that competition will benefit everyone in western Waukesha County.

"We the board - and I speak confidently for the board - are unanimous in support of the new hospital in Waukesha," said Bev Greenberg, the board's chairwoman and vice president of public affairs at Time Warner Cable.

Nor does the board think the decision should be left to the next president now that Howe has announced plans to retire.

Remaining committed to a hospital in Waukesha, Greenberg said, will be one of the criteria in Aurora's search for a new CEO.

Amy Rinard of the Journal Sentinel staff contributed to this report.