Hospital administrators watched their profits fall 61% in 2008, but not because of a decline in patients.
Contrary to widespread industry fears, the latest annual statistical guide from the American Hospital Association shows that patients at U.S. community hospitals received more care in 2008 than the year before, and that the bills were being paid for the services they received. Not only did operating revenue grow in 2008, it grew faster than the year before and only lagged 1 percentage point behind the growth in expenses in 2008.
Even the widely predicted spike in emergency room care, said to be the byproduct of rising numbers for unemployment and the uninsured, failed to materialize as a trend across the industry in 2008, according to the AHA's closely watched annual statistics guide on the nation's 5,010 nonfederal community hospitals.
The AHA's numbers show that hospitals saw steep declines in profitability in 2008 for the same reason as any business that relies on equity markets to subsidize operations—because their investments tanked. Hospitals reported a $4.5 billion loss in nonoperating revenue, which was a sharp reversal from 2007, when investments produced $17 billion in income for healthcare providers and set an industry record by a wide margin.
“It really begs the issue of our dependency on our existing model, where we depend so much on investment income,” said Bill Santulli, executive vice president and chief operating officer of eight-hospital Advocate Health Care, Oak Brook, Ill. The eight-hospital system finished 2008 with a $472 million net loss, despite posting operating revenue of $3.9 billion and a record 6.2% operating margin that year, Santulli said.
“So we've been taking steps to improve our performance so we can create more capital through our operations,” he said. “We can't do that on a dime. The investment income is critically important to us. But we're on a multiyear path to step up our operating performance.” That includes improving safety measures, taking advantage of corporate scale, tightening the revenue cycle and many other means.
The year was a wake-up call for many administrators. Hospitals reported $26 billion less in profits in 2008 than the year before. The downward swing in investment income accounted for $20.5 billion of that difference, and another $4.7 billion came from the faster growth in expenses compared with operating revenue.
Stephen Wright, president and CEO of a regional division for Christus Health that covers six acute-care hospitals in central and northern Louisiana, said the industrywide financial results reported by the AHA square with what he's seen.
“If you look at the trend lines, yes, net operating revenues did increase in many markets across the state, but I would also agree that the bottom lines of most institutions across the state have and continue to decrease,” Wright said.
One the biggest financial challenges for acute-care hospitals remains the migration of patients from inpatient care to outpatient clinics, particularly in areas where the new outpatient-care recipients can move to physician-owned facilities, leaving the less-profitable surgery and emergency cases for not-for-profits such as Irving, Texas-based Christus. Another major funding hurdle is the number of states that are reducing Medicaid payments to address their own budget crises, Wright said.
To combat those trends, many systems have reduced staff. Wright said his northern Louisiana division employs about 180 fewer personnel than one year ago, a 10% reduction.
Lisa Goldstein, senior vice president and healthcare team leader for Moody's Investors Service, said the operating performance of the healthcare sector relative to the economy as a whole was a testament to the managerial acumen of hospital administrators. The financial blow to healthcare would have been far more severe if hospitals had not taken the quick but difficult steps to curb labor costs.
“That has stemmed the trend we were seeing at the end of 2007 and 2008. Management of many of these organizations should be commended for the steps they took,” Goldstein said.
The AHA's statistics show that salaries and benefits were responsible for about 51% of the $626.6 billion in hospital spending in 2008, by far the largest category of expenses. Goldstein said hospital administrators recognized the need to make difficult personnel decisions as the recession wore on, including salary and merit-pay freezes, staff reductions through layoffs and attrition, and a limiting of overtime spending.
Data from the U.S. Bureau of Labor Statistics show that hospitals slowed hiring to a trickle for nearly all of 2009, with an average monthly employment growth of less than one-tenth of a percent. However, in one sign that hospital officials are seeing a thaw in the financial environment, hospital hiring spiked in October 2009. Preliminary figures from the bureau show that more than a quarter of the 37,500 hospital workers hired in 2009 got their jobs in October.
But given that hospitals have only posted one month of negative job growth in the 23 months since the recession began, and that hospital revenue and utilization continued to climb through some of the severest downturn months in 2008, did healthcare defy the experts and prove its status as a so-called “recession-proof” industry?
“I don't think the industry ever said it was recession-proof. People lose their jobs and their health coverage and they show up in the emergency room for care,” Goldstein said.
Here are some of the hard data from AHA, drawn from the balance sheets of thousands of hospitals:
U.S. community hospitals recorded $17 billion more in revenue than expenses in 2008, for a profit margin of 2.6%. Although both figures were declines of more than 60% from the prior year, the magnitude of that drop was exacerbated greatly by the record-breaking financial performance of 2007. Over the past 15 years, U.S. community hospitals as an industry averaged $22 billion in profits, and margins of 5.2%, according to the annual AHA guides published in each of those years. In 2007, the industry set records with $43.1 billion in profits, and a 6.9% margin.
Operating revenue grew by 6.4% to $648 billion in 2008. Over the past 15 years, operating revenue has grown by an average of 6.1%, and it grew by only 6% in 2007.
Investment income was negative in 2008 as hospitals realized huge declines in their equities, the first decline in nonoperating revenue in at least 15 years. Investments have been by far the most volatile metric in hospital financial performance, with annual rates of change fluctuating between 113% growth in 2003 to the 126% decline last year. The 15-year average annual change in investment revenue growth is 7%. Hospital investment portfolios may be in better shape now, with equity markets up about 15% this year.
Total expenses grew faster than average in 2008, with the $626.6 billion in costs representing a 7.4% increase from the prior year. The average rate of expense growth over the past decade and a half is 6.1%, which is also exactly equal to the 15-year average percentage growth in operating revenue.
In terms of utilization in 2008, the total number of admissions grew by 1.2% to 35.5 million, which was consistent with 15-year averages. However, 2008 broke the trend seen in 2006 and 2007, when the number of inpatient bed days decreased while the number of ER visits grew.
In 2008, both inpatient bed days and ER visits grew, by 1.7% and 1.8% respectively. And contrary to fears that high unemployment would drive runaway growth in the use of the emergency room as a point of primary care, the growth seen in ER visits in 2008 was lower than the rate of growth seen in 2006 and 2007, when unemployment rates were lower.
Given the magnitude of economic upheaval in 2008, Urban Institute Senior Fellow Stephen Zuckerman said hospitals seemed to have done well in weathering the recession, apart from the massive investment losses, which had already begun to turn positive again in 2009.
“You look at this picture, it doesn't look that dramatic to me,” Zuckerman said.
“Hospitals have always been pretty creative. They've faced financial challenges in the past, and have been able to reorganize the ways they do things and adjust their staffing,” Zuckerman said. “You can't approach this in terms of thinking that hospitals' costs are a given and their margins only fluctuate as revenues fluctuate. In fact, the expenses that a hospital incurs are very much in their power to change.”
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