The health care delivery system continues to experience significant changes and ongoing reform at both the state and national level. More and more risk is being transferred from the government (Medicare and Medicaid) and commercial payers to hospitals and physicians. Fee-for-service payments, where providers are paid for each encounter, are declining as payments shift to value-based purchasing. Under these arrangements the ultimate payment is tied to quality, efficiency, and other performance metrics. As a result, hospitals and physicians have had to rethink how care is delivered. Insurance capabilities have become more important under value-based payments and population health, so health systems have been responding by either starting or partnering with insurance companies. Consolidation continues across health care, and the number of independent hospitals is declining significantly due to the infrastructure required to be successful.
Fiscal year 2015 was one of great change for Baystate Health. Over the year, the health system grew to over 12,500 team members, with the addition of two community hospitals, Baystate Wing Hospital (September 2014) and Baystate Noble Hospital (July 2015). Our health insurance company, Health New England, experienced significant growth. Baystate Health continues to pursue population health initiatives consistent with federal and state payment reform.
However, Baystate also experienced significant challenges in 2015. External forces continued to exert pressure on the financial stability of the organization, including cuts to the state Medicaid program and the ongoing exclusion of Baystate Medical Center from supplemental Medicaid funding extended to similar organizations. A major Medicaid health plan withdrew from its relationship with Baystate Health, shifting care for nearly 60,000 vulnerable patients to Health New England. Pharmaceutical expenses rose abruptly and dramatically. Finally, an influenza epidemic unparalleled in recent years in scope and duration stressed the capacity of Baystate Medical Center and contributed to expenses rising faster than revenues. These factors contributed to Baystate Health’s financial results described below.
For the fiscal year ended September 30, 2015, Baystate Health reported income from operations of $59.8 million or 2.8 percent compared to $57.3 million or 3.1 percent in fiscal 2014. The positive operating margin was due in large part to a one-time $71.4 million pension curtailment credit realized from freezing the defined benefit pension plan which will lower expenses and minimize volatility in future years.
While the organization realized a significant increase in total operating revenues of 17 percent in 2015, operating expenses grew at a higher rate of over 21 percent. The operating revenue growth was attributable to increased Medicaid membership at Health New England, a full year of Baystate Wing Hospital revenues, and increased inpatient volumes at several Baystate hospitals. Some of this growth was offset by Medicaid payment reductions at the hospitals and new assessments at Health New England from the Affordable Care Act. Operating expenses were negatively impacted by significantly higher pharmaceutical costs, higher medical expenses at HNE, and increased costs of providing patient care.
Baystate Health relies on the operating margin to invest in technology, equipment, facilities, and programs that improve care and benefit the people in our communities. This year we invested almost $52.1 million in our annual capital budget for clinical programs, facilities, and information systems. In addition, construction continues on a $55 million addition to Baystate Medical Center for surgical inpatients and a new pharmacy. Construction is also well underway on a $25 million surgery modernization project at Baystate Franklin Medical Center. Our commitment to caring for the uninsured and underinsured members of our community continues as Baystate Health often absorbs the cost of that care. Baystate Medical Center is one of the largest providers of Medicaid services accounting for approximately 29% of all inpatients. Despite being a relatively low cost academic medical center, reimbursement rates by Medicaid cover only 80% of costs, resulting in losses in the program of over $47 million per year. In total, Baystate Health provided unreimbursed care to our patients at a cost of more than $131 million. In addition, Baystate Health invested over $28 million in community benefit programs to improve the health of residents of western Massachusetts.
Baystate Health is committed to the continual development and application of a comprehensive model for system-wide, continuous improvement in the areas of team member engagement, clinical quality outcomes, patient satisfaction, and cost reduction. Our long history of continuous improvement and cost control continues with an aggressive model for process improvement. Cost containment and reduction are expected as key outcomes in conjunction with improved quality and patient satisfaction.
Our independent public accountants, Deloitte & Touche LLP, have completed an audit of Baystate Health’s financial statements for the fiscal year ended 2015 and issued an unqualified opinion. Click here to view the report.