After years of calculating and reporting hospitals' Medicare inpatient operating margins, members of the Prospective Payment Assessment Commission last week raised questions about whether Congress and the public have been misled by the data.
The bottom line, according to ProPAC Chairman Stuart Altman, is that operating margins reveal little about hospitals' true profits, and Medicare inpatient operating margins tell even less about an institution's overall financial health. Mr. Altman made the observation during last week's meeting of the congressional advisory panel in Washington.
"Because we're into such a major debate about healthcare reform, (margin) information is being used and misused," Mr. Altman said in an interview after the meeting. "Total margins suggest hospitals are doing quite well. Though Medicare looks like it's not paying its share, when it's combined with higher payments by private payers, (hospitals) are not in such bad shape."
This year, for example, ProPAC will report to Congress that Medicare inpatient operating margins slid to a new low of -2.6% in 1992, and it will project that final 1993 margins will dip further, to -5%, declining to -6.9% in 1994 (See chart).
By comparison, total aggregate margins rose in 1992, to 4.5%, up from 4.3% in 1991. The panel will report projected total 1993 margins of 4.8%.
ProPAC Commissioner Richard Berman, president and chief executive officer of Howe-Lewis International, a New York-based personnel recruiting company, said that most people who looked at the Medicare margins would assume that they are "2.6% below what they ought to be. That's misleading."
Larry Mathis, president and chief executive officer of the Methodist Hospital System in Houston, said operating margins were an essential management tool for gauging the performance of various hospital activities. But Mr. Altman said the public perceives that data not as a management tool, but as a reflection of hospital losses.
While Mr. Altman didn't suggest that hospitals were deliberately peddling misleading financial information to boost their lobbying effort on healthcare reform, they "often use operating vs. total margins to reflect what they're making on patient care," he said.
Operating margins include all hospital expenses, but exclude major revenue sources, such as cafeterias, parking lots, gift shops and interest on endowments, thus understating margin levels, Mr. Altman said.
Medicare inpatient operating margins alone, on the other hand, fail to capture the full magnitude of losses incurred by hospitals on the program because they don't include outpatient or capital losses, he said.
Total margins should be the point of reference for gaining the complete picture of hospitals' fiscal health, Mr. Altman contended.
While ProPAC itself can't be accused of creating the confusion over the meaning of hospital financial data, it can be charged with failing to draw the distinctions necessary to prevent such misunderstanding.
Although past ProPAC reports have given Congress both Medicare inpatient operating and total aggregate margin data, the panel has never gone out of its way to alert lawmakers to the greater importance of total margins in judging hospitals' financial condition. In the wake of last week's debate on the subject among the commissioners, Stuart Guterman, ProPAC's deputy executive director, said this year's report may include such a warning.
"All of these numbers have the potential to mislead," he said. "I don't know that there's anything we can do about it except make it as clear as possible what these numbers are and what they aren't."