Everything about Lancaster General Health screams "big."

Its downtown "mother ship," Lancaster General Hospital, towers over several blocks of the northeast quadrant of the city. The Suburban Outpatient Pavilion, Women & Babies Hospital and related facilities sprawl across 126 acres in East Hempfield Township. The value of the health system's land, buildings and equipment, after depreciation, totaled nearly half a billion dollars in fiscal year 2008-2009. And health system revenue climbed to $938 million, up 6 percent from $888 million in 2007-2008.

If that rate of increase continues, Lancaster General Health could top $1 billion in revenues this year.

The size and profitability of Lancaster General Health — the largest employer in Lancaster County — dwarf all other local health care providers, and make Lancaster General Hospital one of the most profitable hospitals in the state, according to a state report issued last week. The hospital's IRS form 990, also released last week, shows that its economic impact on Lancaster County has continued to increase, even as profits have begun to ebb.

Yet those faltering profits, said Lancaster General Health President and CEO Thomas Beeman, are a harbinger. In fact, for all Lancaster General's success, Beeman said his business model is breaking down. "The fee for service model is unsustainable," he said; reimbursement rates remain static even as costs continue to rise. Health care reform remains a huge unknown. And so Beeman said Lancaster General must reinvent the way it delivers health care. "In 10 years, hospitals like ours might be intensive care units, and everyone else will be an outpatient," he said.

The transition will be rough, he said. Some health care providers might not make it.

But LGH may be too big to fail.

The Pennsylvania Health Care Cost Containment Council report issued last week detailed just how big LGH actually is.

Only five of the 166 hospitals studied made a larger profit last year; Lancaster General Hospital's profit margin of 9.3 percent was 17th highest in the state.

Industry experts say hospitals should have a margin of 4-6 percent to remain viable. Lancaster General is the only hospital in Lancaster County at or above that threshold.

Yet while the fiscal year ending June 30, 2009, was a good one, by LGH standards, it wasn't great.

Just two years ago, Lancaster General Hospital recorded record profits of $138 million. Last year's profit of $78.8 million represented a 42 percent fall from that summit.

Lancaster General Hospital and Lancaster General Health are two distinct entities. The "hospital" includes the downtown facility, Women & Babies Hospital and various outpatient facilities around the county; the system includes Lancaster General Medical Group, Lancaster Cleft Palate Clinic and several related operations, in addition to the hospital.

The hospital accounts for about 87 percent of system revenues. Lancaster General, a nonprofit entity, is required to file an IRS form 990 for the hospital only.

The system employs 3,906 full-time workers and 3,215 part-time workers, said hospital spokesman John Lines. And one reason Lancaster General Hospital's profit fell last year is that expenditures on salaries, other compensation and employee benefits soared 23 percent, to $385 million.

Beeman explained that hospital employees still have defined-benefit pension plans, and when pension plan earnings went down, "we had to take it out of our operations" to shore it up.

Lancaster General continues to pay its executives well, though "merit increases were not awarded to executive leaders at the end of the last fiscal year," Lines said. Beeman's salary included base compensation of $605,676, bonuses and incentives of $390,000, "other compensation" totaling $18,538, deferred compensation of $239,877 and nontaxable benefits of $93,218, for a total of $1.347 million.

Rounding out the top-five, highest-compensated LGH employees are Andre W. Renna, former senior vice president of ambulatory care ($925,001); Marion McGowan, executive vice president/chief operating officer ($726,027); Jan Bergen, executive vice president ($681,606); and F. Joseph Byorick III, senior vice president and chief financial officer ($633,435).

Executive compensation is reviewed every year by the board of trustees, which gauges performance and looks at local and national trends. "These are big numbers," said Jeff Lehman, board chairman. "But we think they are justified."

Community support
While the hospital spent more on employees, it also spent more on the community last year.

Payments in lieu of taxes, education programs, unreimbursed medical care costs and other "community benefit support" totaled $71.2 million in 2008-2009. The vast bulk of that, $49.7 million, pertained to unreimbursed Medicaid costs.

The School District of Lancaster received $1.5 million and the City of Lancaster $1.38 million in lieu of taxes. Other taxes paid on exempt property totaled $1.68 million.

"Quite frankly, if it wasn't for [Lancaster General] we'd be raising taxes again," said Lancaster Mayor Rick Gray. "It's that critical."

The hospital also made $6.66 million in grants in fiscal year 2008-2009, up nearly sixfold from the previous year. The biggest single recipient: SouthEast Lancaster Health Services, which received $2.63 million to provide medical and dental care to those in need.

"We have taken a disproportionate amount of responsibility for the medically underserved in this community," said LGH Executive Vice President Jan Bergen. Medical assistance patients account for 15 percent of patient days, but just 4 percent of revenues. "We get paid substantially less than cost," said Bergen.

Added Chief Financial Officer Byorick: "We're happy to take care of these patients. But we need to be successful as an organization in order to do so."

Top regional figure
According to the Pennsylvania Health Care Cost Containment Council, Lancaster General Hospital has more net patient revenue in 2009 than any of the other 18 hospitals in the 11-county region encompassing Adams, Cumberland, Dauphin, Franklin, Fulton, Huntingdon, Juniata, Lancaster, Lebanon, Perry and York counties.

Beeman said he considers LGH to be competing not so much with other local hospitals, but with the University of Pennsylvania Medical Center, Johns Hopkins and other major regional providers. Earlier this month it was reported that Lancaster General will expand beyond Lancaster County, with plans to build a 40,000-square-foot office/outpatient facility in Chester County —!\qwhere LGH will compete with Brandywine Hospital. LGH hopes to have the building completed by 2012.

Yet 2012, health system officials said, is likely to be a relatively soft year for Lancaster General and the health care industry in general. The hospital is in the midst of a $100 million transition to electronic medical records. Costs keep going up: "Our price increase will be about 4 percent this year," said Beeman. "Medicare is planning a zero percent increase" in reimbursements.

Elective surgeries have decreased due to uncertain economic conditions. But the biggest unknown is the impact of national health care reform. Hospitals and health systems are bracing for more patients, but lower reimbursement rates. That, LGH officials said, may lead some hospitals to close, funneling more patients, more revenues and more costs to the health care institutions left standing.

The pressure, even on the big players, could be immense.

"It's as if [hospitals] are at the head of the Colorado River," Beeman said. "We're all in rafts, some of us have oars and some of us don't.

"Some of us just aren't going to make it."