Columbia Reston’s demographics are nearly perfect. Home base is the planned Northern Virginia community of Reston, where most residents are between 25 and 44 years old. Their average income approaches $80,000. Reston’s young, affluent families generally don’t need extensive and expensive care. The hospital makes a higher margin on such patients because insurers cover more of the cost of treatment. That’s in stark contrast with Medicare patients, whose illnesses cost more while offering lower reimbursement rates. As more young families move to Reston, the hospital’s census soars.

All of this adds up on the bottom line. Columbia Reston racked up a 30 percent profit margin and a 30 percent operating margin in 1998 on revenues of $83.7 million. Those are the best margins in the state, where hospitals averaged profit margins of 5 percent and operating margins of 2 percent, according to Virginia Health Information data for fiscal 1998. The future is bright since the patient load will continue to increase. "That has certainly been part of the success this hospital has enjoyed," says Bill Adams, Columbia Reston president and CEO.

While Columbia Reston thrives, however, the outlook for many other Virginia hospitals is bleak. One in four Virginia hospitals has been losing money from operations. They’re getting less for what they do. Contractual allowances — the difference between what hospitals charge and what they are paid by Medicare, Medicaid and managed care — increased from 34 percent to 40 percent of gross patient revenues from 1993 to 1998. Chris Bailey, senior vice president of the Virginia Hospital and Healthcare Association, says preliminary data shows 1999 profit margins dropping to 4 percent. The results can be dire, such as in Southwestern Virginia, where Patrick Community Hospital has gone into bankruptcy (see Page 53).

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But even hospitals with lousy demoraphics can boost their bottom line if they improve training, keep an even closer eye on costs and do more with less, among other things.

Hospitals that aren’t part of a large national chain, for example, can leverage their economies of scale by sharing resources to provide better service. Potomac Hospital, a community hospital just off Interstate 95 in fast-growing Prince William County, has established a partnership with Inova Health System to offer some sophisticated services without the related expense. Potomac didn’t have enough sick newborns to support a full-time neonatology group. But the hospital was able to add that specialty to its repertoire after entering into an agreement with Inova. Now three neonatologists from Inova Fairfax Hospital rotate through Potomac’s nursery.

Meanwhile, the ever-worsening traffic snarls of Northern Virginia are, oddly enough, helping Potomac achieve high margins by giving it clout with managed-care companies. Patients don’t want to venture too far for health care, particularly for services such as obstetrics. "The traffic conditions are so incredibly complicated," notes Paula Brown, senior vice president of corporate finance. "You could be 10 miles away [from another hospital] and not be able to get there for an hour and a half." Recently, Potomac held out for a year on signing a contract with Aetna US Healthcare. "We negotiated until we got a contract that we thought was fair," Brown says. The new contract went into effect in March. Not all hospitals have the same staying power, however.

Other hospitals find it certainly helps not to be bogged down by managed care. One example is Johnston Memorial Hospital in Abingdon, which was the most profitable hospital in southwestern Virginia, with a fiscal 1998 profit margin of 21 percent and an operating margin of 15.5 percent. Because this rural, mountainous area has little managed care, the hospital hasn’t had to give deep discounts to commercially insured patients.

Staffing is one of the hospital’s biggest challenges, yet Johnston Memorial has also avoided expensive temp agencies. The cost of a contract nurse can be almost double the cost of a staff nurse. Only 1 percent of Johnston Memorial’s fiscal 1998 full-time employees were temps, compared with 5 percent statewide. The reason? Abingdon benefits from a ready supply of new nursing school graduates. Two bachelor’s degree nursing programs in Tennessee are within 50 minutes of the hospital: Milligan College and East Tennessee State University.

Cross-training also can solve staffing woes. In fiscal 1998 Chesapeake General Hospital enjoyed a profit margin of 15 percent and an operating margin of 13 percent. Staffing efficiencies are part of the hospital’s healthy bottom line, says Donald Buckley, Chesapeake General president. One example is the clinical secretary position, which combines the functions of a certified nursing assistant and an inpatient unit secretary. The clinical secretary can take vital signs, but the person is also trained to process physician orders for diagnostic procedures.

Hospitals showing healthy profits also have good relationships with providers and patients. CEO Clark Beil says a loyal medical staff helps Abingdon’s Johnston Mem-orial maintain strong outpatient volumes. Physicians have pulled little outpatient work from the hospital, and there are no competing freestanding outpatient facilities. Outpatient revenues represented 45 percent of total gross patient revenues, significantly above the hospital’s 25 percent of five years ago and higher than the 34 percent statewide average.

Patient loyalty has been a boon for Bon Secours Health System’s St. Mary’s Hospital in the hotly competitive Richmond market. It’s easier for hospital administrators to make plans and keep from having too many or too few staff when they can rely on a steady volume of patients. The hospital’s average daily inpatient census has grown steadily, from 247 in 1994 to 269 in 1998. "It’s much easier to manage an organization that has consistent, predictable volumes," says Ann Honeycutt, executive vice president and administrator.

St. Mary’s doesn’t depend on feel-good poster campaigns to please patients and win their repeat business, though. Employees are told to fix what’s broken — apologize, hand out meal passes, send flowers. The staff is particularly sensitive to long waits. A dog-bite victim related to the staff how much she appreciated flowers the hospital staff sent because she had to wait an hour and a half in the emergency room. Such attention to detail pays off. In fiscal 1998 St. Mary’s had a profit margin of 11 percent and an operating margin of 10 percent, putting it in the top quartile of Virginia hospitals.

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Maintaining profits in the coming years won’t get easier. The federal Balanced Budget Act of 1997, which reduced Medicare reimbursements, is putting financial pressure on all hospitals — even those that showed healthy profits in 1998. Additional cuts go into effect July 1. Virginia hospitals will receive $1.8 billion less from 2000 to 2004 than they would have before the law was passed, says Bailey of the Virginia Hospital and Healthcare Association.

A shrinking supply of nurses will compound the problem. Nationally, nursing school enrollment declined 21 percent from 1995 to 1998. Nurses are also harder to hire: They often can find better-paying jobs with pharmaceutical or insurance companies.

Hospitals can’t hike charges, they must continue to find ways to cut costs and build other sources of revenue. Chesapeake General, for instance, purchased a franchise from New York-based Homecare America. The for-profit retail store, which opened in August 1999 across from the hospital, sells supplies such as wheelchairs, bath safety equipment and products for diabetics.

Aside from having tremendous demographics, state leader Columbia Reston has benefited, indirectly, from a major hospital scandal. Its owner, for-profit Columbia/HCA Healthcare Corp. based in Nashville, Tenn., has been revamping itself since it came under federal investigation for allegations of widespread Medicare fraud in 1997. Instead of growing through acquisitions, the company is turning inward to focus on keeping costs in check and improving service.

Columbia/HCA’s national presence gives it powerful clout in negotiating prices with suppliers. Columbia Reston is able to get discounts as high as 40 percent off the $5,000 cost of prostheses used in hip replacements, for example. Being part of a large family also helps it make smarter assessments of its operations.

Will such strategies be enough? Experts aren’t sure. The hospital association’s Bailey notes that "we may be reaching a time when these cost improvements or efficiency gains are bottoming out." Even so, as the population ages there will be more demand for health care. And exciting advances in medicine, such as in the area of gene therapy, are likely to occur over the next 10 years resulting in new therapeutic and diagnostic procedures. For now, though, hospitals are in for a rough time. But demographics and good management can make them more profitable.