Despite the continued challenges resulting from health care reform and the Affordable Care Act, Baystate Health is pleased to report a 2 percent operating margin for the fiscal year ended September 30, 2016 before other non-recurring expenses. This marked a significant improvement of $56.5M over FY2015 ($46.6M in the 2016 fiscal year (FY2016) versus $-9.9M in FY2015).
The operating margin significantly impacts the success of health care organizations as these dollars are invested back in the organization to fund essential capital expenditures including clinical equipment, information technology software and hardware, and facilities renovations and construction. Bond ratings of A+ from S&P and Fitch and A2 from Moody’s were affirmed over the past 12 months with stable outlooks from all. These ratings help us borrow for major projects at lower interest rates.
The year-over-year improvement in the operating margin came from both the insurance and provider organizations. Health New England improved operations by more than $41M compared to the prior year as a result of the successful implementation of a financial improvement strategy. This included the negotiation of a new pharmacy contract to help offset spiraling pharmacy expenses which now exceed inpatient costs for the commercially insured population. Premiums were renegotiated to better match costs, and new medical management initiatives helped reduce the cost of unnecessary care.
The provider organizations, which include the hospitals and the employed physician group, realized a year-over-year improvement of approximately $15M. These improvements resulted from numerous revenue enhancement or expense reduction initiatives implemented in late FY2015 and during FY2016, such as pharmacy expansion and supply chain savings
Health care reform and the Affordable Care Act continue to have a major impact on the health care delivery system nationally. Commercial health care insurance companies and government payers (Medicare and Medicaid) are putting a greater portion of the payments to providers (hospitals and physicians) at risk based on quality, patient satisfaction and financial performance metrics. Bundled payments and global budgets are becoming the norm. This shift from volume-based, fee-for-service payments to value is forcing hospitals and providers to rethink how care is best delivered. New investments in care management and IT systems to better manage care are essential. Quality performance, patient satisfaction and the efficient delivery of care are critical to the success of health care systems under health care reform.
In addition to the national trends, Massachusetts hospitals continue to be challenged by the growth and underfunding of the Medicaid program. This program now includes approximately 1.9 million residents or 28 percent of the population and payments from the Commonwealth are more than 20 percent below the actual cost of hospital services.
While our financial results improved significantly over the past year we were notified in the summer of 2016 that Medicare is going to cut the payment to our hospitals for FY2017 by approximately $20M due to changes in the wage index that were the result of errors made by Nantucket Cottage Hospital. At the same time, Medicaid released their payment rates for FY2017 which includes a $6M reduction. As a result, Baystate Health eliminated approximately 300 full time positions through a voluntary and involuntary program, as well as the elimination of vacant positions. The reduction minimized the impact on non-managerial employees and staff members who take care of patients. The severance expense associated with this reduction accounted for the vast majority of the $17.6M labeled other expense on the consolidated Statement of Operations.
While undergoing major challenges, Baystate Health is well positioned for the future. We continue to provide high quality, efficient care and are investing in resources required to be successful given the challenges of health care reform and population health. Baystate Health is committed to continuous improvement in the areas of team member engagement, clinical quality outcomes, patient satisfaction and cost reduction and we expect continued advancements in these areas.
Our independent public accountants, Deloitte & Touche LLP, have completed an audit of Baystate Health’s financial statements for the fiscal year ended 2016 and issued an unqualified opinion.