Baylor St. Luke’s challenges show why the competition is doing little to reduce the cost of health care


Baylor St. Luke Medical Center has built a reputation as a provider of high quality medical care, ranking #3 in the state and #2 in Houston on U.S. News and World Reports list of top hospitals. It also tends to provide this care at lower prices than its competitors, according to a hospital cost database.

In most industries, this combination – high quality at reasonable prices – would mean success. But not in health care. The most recent public data shows Baylor St. Luke’s is losing money, attracting fewer patients than its bigger, more expensive and, in some cases, lower-ranked rivals.

This disconnect between quality, price and profit is another illustration of why the US healthcare system remains the most expensive in the world, while performing worse than other industrialized countries, analysts said. Rather than rewarding low-cost, high-quality providers like St. Luke’s, it favors those with the size, clout and market power to extract higher reimbursements from insurers.

St. Luke’s lost about $150 million in 2020, the most recent year for which data is available, according to the National Academy for State Health Policy, a nonprofit that maintains a finance database. hospitals based on federal data. By contrast, Houston Methodist, one of the region’s most expensive providers, made an operating profit of about $500 million while serving nearly twice as many patients as St. Luke’s.


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This underscores a health care system in which the rich get richer and costs keep rising, experts said. Hospitals make much of their money from reimbursements paid by commercial insurers, and larger providers have the bargaining power to obtain higher payments from insurers, allowing health systems to grow even further.

Vivian Ho, a health economist at Rice University and a professor at Baylor College of Medicine, said standardized pricing for inpatients and outpatients shows St. Luke’s is providing high-value care at low cost. But this does not matter much for the finances of the health system.

“What I infer from those negative profit margins is that they’re getting lower reimbursement rates, probably from all insurers,” Ho said, “And I guess that’s because they don’t have not market power.

St. Luke’s, meanwhile, faces the same challenges as other hospital systems, including staffing shortages, rising labor costs, and rising prices for drugs and other materials. These increases make its reimbursement rates unsustainable, said Doug Lawson, CEO of St. Luke’s Health.

“We don’t need to be the highest-paid provider in the area,” Lawson said, but St. Luke’s reimbursements need to increase, he added.

Baylor St. Luke’s was paid significantly less than other flagship hospitals for inpatient care from 2018 to 2020, according to RAND Corp., a think tank that created the hospital cost database from hospital insurance claims. many employers, state databases and participating insurance plans. Baylor St. Luke’s standardized price was $19,947, compared to $36,400 at Memorial Hermann, $36,235 at Houston Methodist and $22,918 at HCA Clear Lake.

For standardized outpatient prices, St. Luke’s ranks third of the four hospitals at $275, behind Houston Methodist at $331 and Memorial Hermann at $277, but ahead of Clear Lake at $269.

No incentive

Ironically, hospitals that charge higher prices tend to attract more patients, said Ge Bai, professor of health policy and accounting at Johns Hopkins University. Typically, insured patients are protected from the full cost of care and have no incentive to bargain hunt.

“In other industries, individual consumers make the choice, it’s a fluid market,” Bai said. “That’s not true for health care. You pretty much have to follow what the insurance plan decides.

Market power in the healthcare sector can be measured by several measures. The most common are patient days, which reflect the number of people receiving care, gross revenue, which shows what hospitals billed insurance companies, and discharges.

In all of these measures, Houston Methodist’s flagship location at Texas Medical Center is first among some 70 Harris County hospitals, followed by the Memorial Hermann Medical Center location, then the Southwest location of Hermann Memorial, in Sharpstown. HCA Clear Lake ranks fourth and St. Luke’s fifth.

St. Luke’s last year had about 150,000 patient days compared to Methodist’s 280,000, according to the American Hospital Directory, a national database of hospital finances based on Medicare Cost Report data.

“Methodist really owns the market in terms of brand recognition, publicity, and its ability to place great ads on TV and elsewhere,” James Langabeer, health policy expert at UTHealth Houston.

Ownership changes

St. Luke’s was founded by the Episcopal Diocese of Texas in 1954 and partnered with Baylor College of Medicine and the Texas Heart Institute in the 1960s. It rose to fame in 1968 when Denton A. Cooley and his team performed the first successful heart transplant in the United States and later implanted the first artificial heart at Baylor St. Luke’s Medical Center.

In 2014, St. Luke’s Health System was acquired by Catholic Health Initiatives, a national faith-based health system. Turmoil followed a few years later.

A 2018 investigation by the Houston Chronicle and Propublica found the heart transplant program had worse than expected outcomes and was being investigated by the Centers for Medicare and Medicaid Services. The hospital had since replaced the leadership of its transplant program.

Lawson became CEO in the spring of 2018. Early in his tenure, he had to address shortcomings found in the CMS report, such as updating policies around informed consent, background checks on permanent employees hired before checks are mandatory and the creation of positions of responsibility. to monitor food hygiene standards.

“I personally spent a lot of time in 2018 and 2019 making sure we had (what was needed) in place to really function as a healthcare system,” Lawson said in an interview. “We had a number of regulatory challenges that we had to resolve early on.”

In February 2019, Catholic Health Initiatives and Dignity Health merged to create CommonSpirit, the largest Catholic health care system and the second largest nonprofit hospital chain in the United States. It operates 140 hospitals and more than 1,500 care sites in 21 states.


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During all these developments, the hospital system has invested in the expansion and modernization of its facilities. The hospital has invested some $1.1 billion to expand the McNair Campus, the second Houston campus of Baylor St. Luke’s Medical Center. A 1.2 million square foot facility was licensed as a hospital in the spring of 2019.

Another project in the expansion, the O’Quinn Medical Tower, is due for completion next year. The tower will be the new clinical home of the Dan L Duncan Comprehensive Cancer Center, one of only three National Cancer Institute-designated Comprehensive Cancer Centers in Texas.

Financial constraint

Amid these plans, the COVID-19 pandemic erupted in 2020, straining hospitals and leading to staffing shortages that have persisted. Inflation then soared to the highest levels in 40 years, driving up the cost of drugs, materials and labor.

St. Luke’s Health spent 14% more on salaries and contract labor costs this fiscal year compared to the previous one. Salaries for nurses, among the most in-demand workers, have increased by 30% and contract labor costs for nursing services have more than doubled.

Few, if any, hospitals have anticipated the substantial cost increases due to the pandemic and its aftermath. Insurers have also neglected to account for these extraordinary costs in their reimbursements.

“Our payer agreements did not allow for this cost escalation,” Lawson said. “So the escalating costs associated with labor alone have been a significant burden on our healthcare system.”

Every two to three years, private insurance companies negotiate reimbursement rates with hospitals. According to the American Hospital Association, privately insured patients make up 32% of typical hospital patients, and private insurers typically pay significantly more than Medicare.

A combination of payers is needed to subsidize the cost of charity care and Medicare, which generally reimburses hospitals less than the cost of providing care.

A “long-time actor”

After months of negotiations, St. Luke’s officials said they would soon reach a deal with insurer Cigna, after it let a contract expire in October, leaving around 70,000 patients out of the network.

The two sides reached a stalemate months ago, with the hospital alleging that the insurance company’s reimbursement rates had failed to keep up with inflation. Multiple data points show the hospital receives the lowest reimbursement rate from insurers than any other provider, according to Lawson and an analysis by Ho, Rice’s health economist.


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Lawson said he is comfortable with the arrangement with Cigna and expects an announcement within the next 30 to 60 days.

Insurance company expansions, partnerships and rollbacks aren’t something that’s going to show up immediately in the hospital’s finances, Langabeer said, but over time it will pay off.

“We sometimes only see these changes a few years later to see if they work or not,” Langabeer said. “And I believe they will because I think St. Luke’s is a solid, long-term player.”

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