During the darkest days of COVID, some Michigan hospitals made 100s of millions

During the first years of the pandemic, Michigan hospitals told the public their situation was dire. Their staffs were overworked. Emergency rooms were bursting with patients. Resources were limited.

Many furloughed staff, cut workers’ salaries or trimmed executive pay, at least temporarily.

But an examination of tax records, audited financial statements and federal data collected by a nonprofit found that a few hospitals and health systems did great, posting increases in both operating profits and overall net assets as the pandemic raged.

In December of 2021, Bill Manns, president and CEO of Bronson Healthcare, said in a video message the southwest Michigan health system was at the "highest level of disaster response in our history" and that its staff and resources were stretched beyond anything "we could have ever imagined."

What Manns didn't say was that Bronson, a four-hospital system based in Kalamazoo, was on track to post $112 million in operating profits that year, more than twice what it made in 2019. More than $30 million of that came from federal COVID relief money.

McLaren Health Care, headquartered in Grand Blanc, too, saw its profits rise in 2020, and it had a banner year in 2021.

The 14-hospital health system's net assets rose by nearly $700 million in the fiscal year that ended that September, thanks in part to lucrative investments, according to audited financial reports.

It also made more than $170 million in operating profit, all while taking $53 million in COVID relief from the government.

McLaren declined to discuss its finances or to answer a list of specific questions sent by MLive.

But Becky East, senior vice president and chief financial officer at Bronson Healthcare, said that under the new CEO the health system introduced a "strategic market initiative" focused on "revenue capture" and "growth opportunity" to help improve its operating profit. Based on community need, they have expanded capacity in primary and cancer care, among other services.

Which isn't always obvious to patients.

The profits are "a lot, and I don't really see anything coming out of it," Caitlin Fee, 25, of Kalamazoo said as she left the emergency department May 18 at Bronson Methodist Hospital in Kalamazoo.

She’d waited 3 ½ hours for treatment for her 4-year-old daughter's mouth infection, she said. It was after 7 p.m. and the girl, holding her mother's hand, was tired and teary eyed.

"It seems like they need more staff in there, and more hospital beds."

Sixty-four of 116 Michigan nonprofit and government hospitals made more money in 2021 than they did in 2018, when looking at the hospitals independently and not the overall operations of the health systems that often own them, according to the nonpartisan National Academy for State Health Policy. The increases generally came with the help of money from the Coronavirus Aid, Relief and Economic Security Act.

Among those experiencing the largest gains are Metropolitan Hospital in Wyoming, Bronson Methodist Hospital in Kalamazoo, Ascension Providence Hospital in Southfield, Henry Ford West Bloomfield Hospital and Trinity Health Grand Rapids, long known as St. Mary's.

Marilyn Bartlett, a senior policy fellow for the Center for Health System Costs at the National Academy for State Health Policy, said the questions for health systems that saw their financial fortunes improve as the pandemic tore through hospitals across the country, are where did the money come from, and where did it go?

"Did it go into more investments?" she asked. "Did it go into building more facilities, buying physician practices?"

The onset of the pandemic was "a blow to the vast majority of our hospitals," said Brian Peters, CEO of the Michigan Health & Hospital Association.

Hospitals were going through as many masks, gloves and gowns in a week as they normally would in a year, he said. Staffing costs "exploded" as hospitals brought in travelling nurses to plug holes in the nursing workforce. At the same time, they stopped performing most elective procedures.

"One of the things that that was exposed by the pandemic is the fragility of our traditional volume-based reimbursement system, which traditionally has paid hospitals and physicians and other providers for every additional test, every additional procedure," he said.

But, in the first year of the pandemic, federal money filled the gaps.

Researchers from Johns Hopkins University found that the $175 billion that went to hospitals through the CARES Act, Paycheck Protection Program and Health Care Enhancement Act kept profit margins stable and actually increased profits for many small and rural hospitals.

"Taxpayers not only bailed out the hospitals but also gave them more of a financial buffer for the future," said Ge Bai, one of the authors of the study and a professor in Johns Hopkins’ Carey Business School and its Bloomberg School of Public Health.

By 2021, Peters said, the relief money was flowing and the initial difficulties securing protective equipment had largely been worked out, but staffing costs were also rising, in part because hospitals were using more nurse traveler agencies and those agencies’ rates were going up.

The difficulty, he said, is that hospitals generally can't respond quickly when prices change.

"The gas station when the price of gas goes up through the supply chain, they can literally reprice that gas at the pump every morning," he said. "In healthcare, Medicare tells us what they will pay us. Medicaid tells us what they will pay us. The private insurance contracts are negotiated well in advance."

In the first month of the pandemic, the state office of the Occupational Safety and Health Administration got five complaints about McLaren's hospital in Flint saying, among other things, that "COVID-19 patients are spread throughout the hospital and we have zero PPE available to keep us safe."

At least two employees died from the disease: Patrick Cain, a nurse, and Roger Liddell, who worked in procurement.

McLaren Macomb "was hit very hard with COVID patients to the point that there was a freezer truck out back, and I want to say this as respectfully as I can, but full of the bodies of COVID patients who had passed away," said Dina Carlisle, president of OPEIU Local 40.

By mid-April, McLaren had announced temporary furloughs and other cost-saving measures, necessitated, it said, by "the cancellation of nonessential procedures."

Kevin Tompkins, a spokesman for McLaren Health, said at the time that hundreds of leadership level employees would be giving up a week of pay, roughly a 2% pay cut.

But, according to tax filings, McLaren CEO Philip Incarnati got a raise of nearly 12 percent that year, bringing his 2020 salary to more than $8.1 million.

Michael Lacusta, the senior vice president for business development, saw his compensation rise by more than 50 percent, an increase of nearly $457,000.

Tom Brisse, the CEO of McLaren Macomb, saw his compensation almost double to $1.85 million.

In fact, most of the McLaren senior executives listed in the health system's tax filings saw their compensation rise significantly in 2020.

It's worth noting that a Trump-era tax law mandates a 21 percent excise tax on all nonprofit compensation over $1 million a year, which must be paid by the nonprofits themselves. That means Incarnati's salary alone costs the health system nearly $1.5 million in additional taxes.

That "does put a bad taste in a lot of the nurses’ mouths," said Laken Gray, registered nurse at McLaren Bay Region Hospital in Bay City, particularly those who have been at the hospital through the worst.

"They feel like McLaren is not supporting us nurses who are actually at the bedside caring for these patients and keeping them safe," she said.

Bronson, too, mandated furloughs in 2020 for several hundred non-clinical employees. Manns took a 25% salary reduction. Other executives also took pay cuts for a few months.

But any sacrifices made during the early months of the pandemic are not reflected in top administrators’ pay.

Executive compensation for Bronson Healthcare increased from about $9.7 million in 2019 to about $12.2 million in 2020, according to tax filings.

Longtime CEO Frank Sardone retired in 2019 but received more than half his salary – almost $900,000 – in 2020. Manns worked part of the year in 2020 and earned about $798,000. A senior vice president who was paid about $881,000 served as interim CEO from January to March.

East, the financial officer, noted executive compensation amounts to less than 1% of the salaries paid at Bronson and these leaders receive significant specialized training and typically have years in the field in a variety of management positions.

The board, she said, sets the salary levels based on several factors, including industry standards, market information, skills and experience, level of responsibility and quality of leadership.

But the health care system ended 2020 with operating profits just shy of $75 million - $47 million of which came from federal COVID relief money – and an overall increase in net assets of nearly $172 million.

Earlier in the year, the revenue loss had been "significant" and expenses were not decreasing, East said. The health system did not know what relief funds it would receive.

"If we would have had a crystal ball, it would have been a lot easier to make some operational decisions," she said.

The federal dollars were intended to help hospitals make up for lost revenue and cover additional operating expenses, East said, which greatly improved Bronson's margins through the pandemic, "but it still didn't cover all of that."

East said use for the funds was "very prescriptive." They had to go toward the pandemic and additional incurred expenses.

In January of 2021, Bronson opened its new $60 million cancer pavilion in Kalamazoo named for Sardone, who served the hospital for 32 years.

That summer, it broke ground on a new $35 million in-patient behavioral health facility in Battle Creek, a joint venture with Acadia Healthcare Co.

"I mean I feel like their services should be better if they made that much, or maybe they should give the employees a raise," said Tee Washington, 25, of Kalamazoo, as she walked to Bronson Methodist Hospital one May evening. She had a friend recovering from surgery, and he was having trouble securing staff assistance in a timely manner.

"Where did it go? What did they invest? I know for sure the employees’ pay did not change. I worked here over a year ago," said Washington, who made minimum wage working in the hospital kitchen for a few months. As a mother of two young children, she quit during the pandemic, but still works in health care.

"To have all that money, I would have thought somebody would have got a raise around here, between COVID, everybody was risking their life, life or death at the time."

McLaren's operating profit, the money it made from its business operations excluding investments, pension adjustments and the like, was $148 million in 2020. That's nearly $100 million more than it made the year before the pandemic.

That year, McLaren got $146 million of COVID relief money from the federal government and $386 million in accelerated Medicaid payments.

And, as Corporate Vice President of Facilities Management Dan Medrano put in that year's annual report, "the corporation stayed committed to its major capital projects. There were no corporate financial cuts, and no pressure to pause or slow down."

McLaren pushed forward on the new $600 million hospital it was building in Lansing and on renovation projects at hospitals across the state.

It also acquired St. Luke's hospital outside of Toledo. The financial details of the deal weren't disclosed, but McLaren promised to invest $100 million over five years to improve St. Luke's campus. Instead, McLaren announced this past March that it planned to close St. Luke's and sell off the land and facilities, citing "declining revenues and an unstable reimbursement."

Both McLaren and Bronson are nonprofit health systems, but even hospitals that aren't operated for profit are subject to what leaders in health care call the tension between margin and mission. Without money, it's hard to do much good.

Citizens want nonprofit hospitals, in return for their tax-free status, to provide benefits to the communities and the people they serve, said Dr. John Ayanian, a primary care doctor and director of the Institute for Healthcare Policy and Innovation at the University of Michigan.

"They also have to generate enough margin to maintain their capital, their equipment, their buildings, to hire appropriate staff," he said. "So, we don't want hospitals operating with deficits because of unpaid patient bills. But…they should not be generating huge profits or huge margins and financial reserves that are more for the benefit of the management team."

And it's not hard to find those who think the balance has tipped too far toward making money.

"It's hard to distinguish for profits and nonprofits, because there's really no structure that demands it," said Dr. Vikas Saini, president of the Lown Institute, a nonpartisan think tank that advocates for health system reforms, including prioritizing healing over profits.

American hospitals make money on a fee-for-service basis, he said. The ones that can get the most people coming in to get the treatments with the highest profit margins will make the most money, which isn't the same as serving the needs of their communities.

"There's no sort of oversight about capacity, how much of which kinds of services a hospital can provide and spend money on and really be good at," he said. "And there's no real reckoning with actual need."

Vivian Valdmanis, a professor at the School of Interdisciplinary Health Programs at Western Michigan University, said that part of the issues is "you’re bringing in businesspeople to run hospitals. In business school, you don't learn how to give money away."

Julie Fream, for example, is chairperson of the board for Corewell Health, the newly named behemoth born when Beaumont Health in Southeast Michigan merged with Spectrum Health on the state's west side. She's also the president and CEO of Southfield-based Original Equipment Suppliers Association, which champions the interests of automotive suppliers.

Martha Fuerstenau is board chair at Henry Ford Jackson Hospital. She is president and CEO of American 1 Credit Union.

McLaren Central Michigan's chairperson is Doug Ouellette, a president for Mercantile Bank of Michigan.

Hospitals are not marketing to poor people, Valdmanis said. They are working to attract people with quality insurance, people who can pay. That's is clear from the way they advertise. They do not boast about doling out charity care. They tout the quality of their services.

"As a paying person or a person with insurance, what's more important to you, the hospital with all the latest technology or the hospital that's generous to the poor population?" she said.

Declines

For Bronson and McLaren, the successes of the pandemic's first years didn't last.

McLaren's operating profits fell below $80 million in 2022. Its overall net assets fell by more than $300 million. At Bronson, operating profits dropped to just over $50 million and its net assets declined by more than $16 million.

Federal assistance had largely dried up. The strains of the pandemic became an ongoing staffing shortage. A Michigan Health and Hospital Association survey completed in March found that the state's hospitals had 27,000 job openings, among them nearly 8,500 open nursing positions.

By late 2022, hospitals across Michigan had lost an aggregate of 1,700 staffed beds. Hospital leaders were looking for the state to help. And the Health and Hospital Association was talking about a "funding crisis."

The pandemic "showed the fragility of our traditional system," Peters said, "and it's forced our member hospital and health system leaders to really think about a new model."