Gov. John Lynch took the temperature of the health care industry this week and offered harsh medicine for New Hampshire’s nonprofit hospitals.

In his annual budget address, Lynch said the hospitals hadn’t addressed the high cost of health care because they instead spend profits on CEO pay, advertising campaigns and multimillion-dollar building projects.

"Those are costs that we all see in our ever-increasing health insurance premiums," Lynch said. "To that, I say, ‘Enough.’?"

So, as part of his proposal to create a balanced state budget, Lynch has called for stripping hospitals of the collective $20 million in state aid they receive annually and placing a moratorium on new hospital construction projects.

The lobbying group that represents the state’s 26 hospitals, 24 of which are nonprofit organizations, replied that it "couldn’t be more disappointed in Governor Lynch’s comments."

Steve Ahnen, president of the New Hampshire Hospital Association, said taking away the $20 million in state aid that the hospitals use to offset unpaid bills "will only drive up the cost of care in our state."

The association also defended the construction of buildings, the purchase of physician practices and the pay scale of hospital CEOs, saying they all lead to more efficient health care.

"New Hampshire is facing a significant budget challenge … one that will require the involvement of all stakeholders to solve," Ahnen wrote in a statement. "The governor’s remarks are unfortunate and they do not help to foster an environment to solve the challenges that we face."

Lynch’s surprising remarks about hospitals illustrate the larger divisive national debate about health care costs. Blame for spiraling costs is placed in all corners, and attempts to make health care affordable can’t seem to get off the ground.

Lynch, a Democrat whose wife is a doctor, did praise the state’s hospitals in his speech.

"The doctors, nurses and other staff members working at our hospitals provide high-quality care comparable to that offered anywhere in the country," he said.

But looking to balance the budget, Lynch proposed ending the state’s payment of $20 million for uncompensated care costs that hospitals face when patients can’t pay their bills.

"The hospitals can afford this change," he said. "Hospitals get millions of dollars in tax breaks for being nonprofits."

Lynch didn’t stop there. He slammed the nonprofit hospitals for how they spend excess revenue.

"According to their latest public filings, the top 200 executives of our 24 nonprofit hospitals made a collective $60 million," Lynch said. "Collectively, New Hampshire’s nonprofit hospitals generated cash over their expenses of more than $200 million.

"Instead of using that excess cash to reduce health care costs, hospitals spend it on advertising, trying to attract market share from each other, on buying physician and laboratory practices across the state, and then increasing overhead charges to patients

"They are pouring revenues into multimillion-dollar new facilities. In the last five years, hospitals have launched $500 million in capital projects. Another $50 million worth of projects are currently pending before the Certificate of Need board. Most of these expansions are discretionary. And these facilities are driving up utilization and costs."

The Legislature would need to approve Lynch’s proposal to instead spend the $20 million on Medicaid optional services.

Lynch also asked the state Health Services Planning and Review Board, the regulatory board that approves health care system investments, to institute a moratorium on the construction of new hospital facilities.

Lynch directed the Department of Insurance, which he oversees, to conduct a review that will determine "what our state’s true health care facility needs are," he said.

The organizational paths of Nashua’s two hospitals seem to fit into Lynch’s list of concerns.

Before the recession, St. Joseph Hospital and Southern New Hampshire Medical Center embarked on large-scale building and renovation projects. And even as the economy soured, they opened medical practices across Greater Nashua.

The hospitals’ two CEOs are also well-compensated for their leadership.

Peter Davis, who has since retired as president of St. Joseph, had a base salary of $385,770 in 2009, the last tax year for which filings were made public. When including bonuses and other forms of compensation, Davis earned $547,408 in 2009.

Compensation for the hospital’s new president, David Ross, hasn’t yet been publicly released in a tax filing.

Thomas Wilhelmsen, president of SNHMC, had a base salary of $452,619 in 2008, the most recent tax year made public in his hospital’s filings. When including bonuses and other forms of compensation, Wilhelmsen earned $748,743 that year. (Lynch earns $120,095, which is less than Wilhelmsen’s $136,000 bonus in 2008.)

Ahnen, of the hospital association, couldn’t be immediately reached for comment, but in his statement, he wrote that hospital investments and construction projects have created high-quality health care and have helped local economies.

He also defended the pay of hospital CEOs, saying Lynch’s remarks "failed to reflect the demands that are placed on the leaders of today’s hospitals."

Wilhelmsen didn’t respond directly to Lynch’s comments, but instead offered a press release.

"We share concern over the escalating costs of health care," Wilhelmsen wrote. "That’s why Southern New Hampshire Health System has been working hard to deliver care in the most efficient way we can, offering our patients some of the lowest rates and highest quality scores in the state."

He added that SNHMC has joined a pilot program in which patient outcomes and lower costs are rewarded over more tests and more expensive treatment.

Ross wasn’t available for comment, said Melissa Sears, vice president of strategy and business at St. Joseph. But Sears said St. Joseph shared the hospital association’s disappointment in Lynch’s remarks.

"I think the governor’s heart is in the right place," Sears said. "The funds that the hospitals have in excess go back to the communities by funding the services the community needs.

There is a common perception that nonprofit hospitals shouldn’t make a profit, Sears said.

"But if you’re just breaking even or you’re losing money, you’re not going to be here for long," she said.

Sears said compared with other hospitals, St. Joseph probably spends less on advertising and construction. And the hospital doesn’t build just for the sake of building, she said. All new machinery and services aim to provide the most efficient care that ultimately lowers costs, Sears said.

Lynch’s critique comes only weeks after the state hospital association issued a report that claimed an increasing number of uninsured patients had led to a shrinking revenue stream for hospitals.

Of the state’s 26 hospitals, seven reported being in the red in the first nine months of 2010, the association’s report said.

But the report also showed the majority of hospitals had a positive operating profit margin despite dealing with more uninsured patients. An operating profit margin is what’s left of a hospital’s revenue after production costs, such as wages and materials, but before taxes and costs such as bonuses, interest or rent.

St. Joseph had a 1.7 percent operating profit margin in 2008, saw the margin dip to zero percent in 2009 but rebounded in the first nine months of 2010 to 3 percent, according to the report.

Last year, St. Joseph claimed $171.47 million in revenue before expenses, according to its tax filing. In 2008, the hospital’s revenue before expenses was $168.19 million.

Southern New Hampshire Medical Center also reported gains. SNHMC had a 1 percent operating margin in 2008, and saw an increase to 3 percent in 2009 and a smaller jump to 3.2 percent in the first nine months of 2010.

For the tax period October 2008-September 2009, SNHMC claimed $197.78 million in revenue before expenses, according to its tax filing. In the previous tax cycle, the hospital had $191.39 million in revenue before expenses.

In his statement, Ahnen said Lynch’s $200 million figure for statewide hospital profit was wrong. He didn’t provide a different figure.

The association’s claim that hospitals are in an "economic crisis" might mean their operating profit margins just aren’t as large as they used to be.

Historically, New Hampshire hospitals have enjoyed higher profit margins on average than the national average, according to a 2007 report by the Center for Public Policy Studies, "Financing New Hampshire Hospitals: Cost-Shifting in 2005."

From 1996-2005, Southern New Hampshire Medical Center had the second-highest operating margin of any nonprofit in the state, at 10 percent, the report states.

St. Joseph Hospital fell roughly in the middle during that period, with an operating margin of 5.4 percent.

Albert McKeon can be reached at 594-5832 or amckeon@nashuatelegraph.com. Staff writer Andrew Wolfe contributed to this report.