While the prospect of healthcare reform loomed, profits grew at the nation's hospital-based systems in 1993 as many of them aggressively moved to cut costs and seek partnerships.
Operating profits rose 7.5% in 1993 to $4.4 billion for the 160 systems that reported complete financial information for MODERN HEALTHCARE's 18th annual Multi-unit Providers Survey. Total net patient revenues increased 5.2% to $81.8 billion in 1993 from $77.7 billion in 1992, the survey said.
As a result, operating profit margins rose to 5.4% in 1993 from 5.3% in 1992, the fourth consecutive year margins have increased.
From 1981 to 1985, average operating margins ranged from 4% to 8%, previous surveys have indicated. Margins dropped significantly after 1985-to 2.4% in 1986, 2% in 1987, 1.7% in 1988 and 1.2% in 1989.
Margins dropped from 1986 to 1989 primarily because hospitals were unable to contain rising costs and couldn't increase revenues as they had in the years before managed care and Medicare's prospective payment system.
In 1993, hospital systems caught merger mania in their desire to slash overhead expenses and get a handle on costs in a time of diminishing medical inflation and increasing payer discounts. That strategy paid off in higher operating margins.
For-profit systems used mergers to boost operating margins-a key ratio used by their investment bankers to tout financial performance.
In 1993, Columbia Hospital Corp. merged with Galen Health Care, claiming $20 million in overhead savings. Then, early this year, Columbia merged with Hospital Corporation of America, predicting another $130 million in corporate savings.
This month, Louisville, Ky.-based Columbia/HCA Healthcare Corp. boasted operating margins of 21.7% in the first quarter of 1994. That was up from 21% in the first quarter of 1993 and far above the industry average.
"Since the merger only took place in mid-February, few of the HCA merger synergies were realized in the first quarter," said David Vandewater, Columbia/HCA's chief operating officer.
Not-for-profit systems held down expense increases in 1993 by using layoffs and other selected downsizing strategies to improve productivity, executives said. Systems also worked with physicians to control utilization, dramatically reducing costs and improving quality, executives said.
"It is a recognition that there is only so much money you can squeeze out of operations. The big money savings comes through working with doctors on utilization," said Maurice Elliot, president and chief executive officer of Methodist Health System, Memphis, Tenn. "It takes a lot of management to work with the medical staff. It's not easy, but the rewards are so much greater."
MHS operated 12 hospitals with 1,850 staffed beds in 1993, making it the survey's 47th-largest system.
Reflecting the ongoing shift toward system affiliation, hospitals owned or managed by systems increased 4.7% to 1,964 in 1993 from 1,875 in 1992, according to the 199 systems that reported figures for the number of hospitals and beds.
Total staffed beds increased 5.1% to 353,701 in 1993, and licensed beds increased 5.9% to 400,931, the survey said.
The 1993 survey includes responses from 313 systems, including 242 hospital-based healthcare systems that operate nursing homes, psychiatric and rehabilitation hospitals, HMOs, and PPOs as well as own or manage group practices. The other respondents were 71 long-term-care systems.
MODERN HEALTHCARE defines a system as a healthcare organization that owns, operates or manages two or more acute-care hospitals, specialty hospitals, nursing homes or continuing-care communities.
Nationally, 291 healthcare systems accounted for 2,877, or 54.4%, of the 5,292 community hospitals and 512,000, or 55.6%, of the 920,943 staffed acute-care beds in 1993, according to the American Hospital Association.
In addition, another three healthcare organizations with 1,012 beds are classified as "single-hospital" systems, the AHA said. The association defines a single-hospital system as a single hospital that operates three or more pre-acute or post-acute facilities such as ambulatory-care centers, nursing homes or continuing-care communities.
The 242 hospital-based systems that responded to the survey represent an 82.3% response rate. However, only 160, or 66%, of the 242 responding systems provided complete financial information.
The "average" system. In 1993, the average number of hospitals per system rose 5.3% to 9.9 from 9.4 in 1992, the survey said. The average number of staffed beds per system increased 5.1% to 1,777 from 1,692.
The average system reported a 6.8% increase in assets to $647.3 million in 1993 from $605.8 million in 1992. Total liabilities per system averaged $250 million in 1993, a 6.8% increase from 1992; total current liabilities averaged $111.7 million in 1993, an 11.2% increase from 1992.
Average net patient revenues per system rose 5.2% to $511.3 million in 1993 from $485.9 million in 1992, the survey said.
At the same time, average operating income per system increased 7.5% to $27.7 million in 1993 from $25.7 million in 1992, marking the sixth consecutive year of increased profitability on operations. Operating profits rose 28% in 1992, 44.8% in 1991, 95% in 1990, 10% in 1989 and 68% in 1988.
In 1993, for-profit chains recorded the greatest increases in operating profits, a change from 1992 when profitability gains for systems were fueled by the not-for-profit sector.
The 14 for-profit chains that reported complete financial information posted a 24.1% increase in operating profits to $2.0 billion in 1993 from $1.6 billion in 1992. Revenues increased 4% to $20.3 billion in 1993, the survey said.
Operating profits for the 132 not-for-profit systems, excluding the 14 public systems, rose 4.5% to $3.1 billion in 1993 from $3.0 billion in 1992. Revenues rose 5.8% to $54.4 billion in 1993 from $51.4 billion in 1992.
The 14 public systems lost $729.3 million on operations, compared with a loss of $510.3 million in 1992, the survey said. The overall loss, however, was the result of huge losses posted by the public systems in Los Angeles and New York City, which lost a total of $775 million on operations.
Revenues for the public systems increased 3.9% to $7.0 billion in 1993. For public systems, operational revenues exclude contributions from government entities.
In the not-for-profit sector, the average system earned $23.7 million in operating income in 1993. For-profit chains earned an average of $144.6 million in operating income in 1993, according to the survey.
The difference, however, lies primarily in size. For-profit chains averaged 42.8 hospitals and 6,130 staffed beds each in 1993, while the not-for-profit systems averaged 6.9 hospitals and 1,425 beds each.
Rising margins. For-profit chains had an average operating margin of 9.9% in 1993, compared with 8.3% in 1992, the survey said. Non-public, not-for-profit systems had an average operating margin of 5.8% in 1993, compared with a 5.7% margin in 1992.
Operating margins typically don't reflect such non-operating income as interest, charitable donations and non-patient-care revenues such as parking lots, gift shops and cafeterias. They also don't include expenses such as taxes, interest on debt, and merger or restructuring costs.
Last year, the 68 secular not-for-profit healthcare systems that submitted complete results had a 7.2% increase in operating income to $1.1 billion, or $16.6 million per system. Net patient revenues rose 6.7% to $19.6 billion, or $288.7 million per system. Their margins remained approximately the same in 1993 at 5.7%.
The 45 Roman Catholic healthcare systems reported a 0.9% decrease in operating income to $1.46 billion, or $32.5 million per system, in 1993. Total revenues rose 5.2% to $26.2 billion in 1993, or $581.8 million per system. Their margins declined to 5.6% in 1993 from 5.9% in 1992.
The 19 systems in the "other religious" category reported a 15.2% increase in operating profits in 1993 to $546.7 billion, or $28.8 million per system. Total revenues rose 6% to $8.6 billion, or $453.3 million per system. Their margins increased to 6.3% in 1993 from 5.8% in 1992.
The bottom line. While operating profits were up, systems' bottom lines in 1993 revealed a slightly different picture.
Total net income, which includes interest income, donations and other non-patient-care related revenues, rose 13.2% to $3.6 billion in 1993. But that figure is almost $1 billion less than systems' total operating income of $4.4 billion.
Net income for systems was 24% lower than operating income in 1993 for two reasons, executives said.
First, many systems earned less on investment income in 1993 because interest rates were lower than in 1992. Lower payments affect the debt side, too, but systems that have been accumulating cash in anticipation of reform felt the impact on their bottom lines.
Second, several large for-profit chains took significant write-offs that affected their net income. In 1993, investor-owned hospital companies reported $643 million in one-time adjustments to their earnings, according to WDI Capital Markets, Hilton Head Island, S.C.
For-profit chains had a strong year, reporting a 24.1% increase in operating income to $2.0 billion and a 313.1% increase in net income to $898.1 million.
Since the net income figure includes various write-offs in 1992 and 1993, operating income is a better indicator of how the investor-owned chains managed their hospitals last year. Net income also is lower because it includes debt expenses and taxes.
For example, write-offs often have a "significant impact," noted Keith Pitts, chief financial officer for OrNda HealthCorp, Nashville, Tenn. In fiscal 1992, OrNda's earnings were affected by $79.6 million in restructuring and other special charges.
Last year, the company agreed to merge with two other hospital chains, King of Prussia, Pa.-based American Healthcare Management and Burbank, Calif.-based Summit Health. The merger, which was completed last month, created the nation's fifth-largest investor-owned hospital chain.
Merger expenses affected the bottom line at Columbia/HCA, which reported $151 million in charges related to the Galen merger.
Net income also was reduced last year at Santa Monica, Calif.-based National Medical Enterprises, which reported $85 million in unusual costs associated with its psychiatric hospital subsidiary in its fiscal year ended May 31, 1993. That included legal fees, divestiture and realignment costs.
At Dallas-based American Medical International, operating income grew 12% to $306 million for the fiscal year ended Aug. 31, 1993. However, AMI actually saw overall net income drop by half to $41.5 million, or 54 cents per share, because the 1992 figures include $79 million in one-time gains.
AMI, like many for-profit systems, focused on cutting expenses, especially interest costs. The 35-hospital chain cut its debt by $200 million to $1.3 billion in 1993.
Meanwhile, the 132 reporting not-for-profit systems, excluding the 14 public systems, reported a modest 2.5% increase in total net income to $2.9 billion in 1993 from $2.8 billion in 1992. The not-for-profit systems' 1993 total net income, however, was nearly $160 million less than their reported total operating income of $3.0 billion in 1993.
In the not-for-profit sector, net income generally is higher than operating income because of revenue gains from investments and donations.
Executives attributed the difference in 1993 to higher costs of refinancing long-term debt, lower-than-expected gains on investments and, in some cases, millions of dollars in write-offs on debt for new construction and renovation projects.
Not-for-profit players. For Mr. Elliot, Methodist Health System's president and CEO, 1993 was one of the system's finest years. MHS saw a 38% increase in net income to $20 million from $14.5 million in 1992, he said.
Mr. Elliot attributed part of the system's success last year to good management and the hiring of a full-time medical director at the flagship facility, 1,008-bed Methodist Hospitals of Memphis.
Working with physicians on utilization, clinical pathways, practice parameters and outliers, Ron Lawson, M.D., vice president of medical affairs, was able to reduce length of stays by one day to 6.4, Mr. Elliot said.
Like most systems, MHS also is developing a strategy to integrate group practices into a healthcare network to contract on a capitated basis with managed-care companies. In 1993, Methodist acquired two clinics in Mississippi. It also created Memphis Primary Care Associates for the purpose of acquiring and managing practices.
For Catholic Health Corp., based in Omaha, Neb., 1993 was a year that began with one set of priorities and ended with a different set, said Diane Moeller, CHC's president.
"The things we discuss now, two years ago we weren't talking about," Ms. Moeller said. "The majority of our meetings are evaluating opportunities for integrating our health services with others."
In 1993, CHC operated 36 hospitals with 5,078 beds in 13 states. CHC operates like a management company for eight co-sponsoring Roman Catholic congregations.
CHC's operating income rose 7.4% in 1993 to $39.1 million from $36.4 million in 1992. Its net patient revenues decreased less than 1% to $984.9 million, for a 4% operating margin.
In 1993, CHC eyed expansion in markets where it already operated healthcare facilities. "We needed to expand in those markets to have enough volume and presence for managed-care contracting," she said.
This year, CHC is continuing to focus its efforts on integrating its existing healthcare facilities, especially in Minnesota, Wisconsin and California, where managed competition already is shaping the markets, she said.
Like many systems, CHC is discussing partnerships with physicians, managed-care organizations, and other hospitals and providers in its present markets, Ms. Moeller said. Affiliation options range from contractual to operational but don't currently include mergers or acquisitions, she said.
At Catholic Healthcare West, San Francisco, 1993 was a year of fast-paced change that emphasized cutting costs and working with hospitals, physicians and insurers to develop an integrated delivery network, said Richard Kramer, CHW's president and CEO.
"We are going through a transition, from a system of acute-care hospitals toward developing regionally integrated delivery systems in each of our markets and then tying those into a much larger multistate system," Mr. Kramer said.
Like most systems in California, CHW's priorities are linking its hospitals and other facilities with affiliated physician groups and developing strategic alliances with other providers to contract for managed care.
"Payers and providers in California are rapidly developing delivery systems, heading toward a capitated environment," Mr. Kramer said. "There is consolidation on the payer side and with physician groups. Hospitals and hospital systems are scurrying about to select partners for the future."
CHW, with 23 group practices representing 931 physicians, ranks second in number of practices owned or managed by a hospital-based system, the survey said. Most of CHW's groups are under contract management agreements.
CHW also experienced a 50% decrease in net income in 1993 to $45 million in 1993 from $90 million in 1992. Mr. Kramer attributed that dip, in part, to two new hospitals it opened in 1993 at a total cost of $180 million and a 14% decrease in investment income.
Last year, CHW earned $48.2 million on its investments, compared with $56 million in 1992, according to company reports.
CHW hopes to redesign the way patient care is delivered and achieve cost reductions through layoffs and efficiency gains. By the end of 1994, Mr. Kramer projects net income to rise to the $90 million level again.
For-profit companies. Spurred by investors looking for strong returns, for-profit chains are expected to continue their consolidation drive in 1994.
"The speed of change is really what is noticeable," said Woodrin Grossman, a Price Waterhouse partner in Dallas who heads the accounting firm's national healthcare providers practice. "It's going to be like a big snowball coming down the mountain."
Mr. Grossman said he believes consolidation among hospitals is just the beginning of consolidation in the healthcare industry overall.
Change and consolidation were exemplified in 1993 by Columbia/HCA Healthcare Corp., which became the investor-owned industry's 800-pound gorilla. In last year's MODERN HEALTHCAREsurvey, Columbia Hospital Corp., then based in Fort Worth, Texas, was a middle-of-the-pack runner. It ranked 13th in terms of beds and 17th in terms of units.
Today, Columbia/HCA, transformed by two mega-mergers, is the nation's largest non-government hospital chain. Only the U.S. Department of Veterans Affairs-which didn't report revenue figures-is larger in terms of beds. Columbia/HCA operates 44,903 medical/surgical beds, about 30% fewer than the VA.
In terms of revenues, Columbia is on top, reporting $10.3 billion in 1993. Since the company's growth came from mergers with Galen Health Care and Hospital Corporation of America, it compares those revenues in 1992 with $9.9 billion. However, in 1992, Columbia Hospital Corp., with its 20 hospitals, reported revenues of just $762 million.
Columbia/HCA now has a market capitalization of $14 billion, which its chairman, Richard Scott, recently said eclipses the $4 billion held by HCA at its height in the mid-1980s.
Other large mergers that got under way in 1993 were consummated this year. OrNda merged with AHM and Summit into a chain of 46 medical-surgical and two psychiatric hospitals in 17 states. The merger makes the new OrNda the fifth-largest hospital chain in terms of revenues with $1.6 billion annually.
In terms of beds operated, OrNda would drop to sixth because Quorum Health Group, Nashville, Tenn., manages 31,495 beds at 252 hospitals. However, since those hospitals are managed under contracts rather than owned, the revenues generated by them are a fraction of other hospital chains'. The company's owned hospitals accounted for 67% of its net operating revenues during its fiscal year ended June 30, 1993.
Quorum is acquiring more hospitals. Last year, it bought the 10 medical-surgical hospitals of Charter Medical for $340 million. Although Quorum will end up keeping only three of those, it already swapped two of them for two Columbia/HCA facilities. The purchase will make Quorum much more dependent on its owned hospitals for revenue than its management contracts.
The purchase of Epic Healthcare Group by Healthtrust-The Hospital Co. also started in 1993 and was completed this year. That $1 billion deal makes 115-hospital Healthtrust the nation's second-largest investor-owned company, with annual revenues of $3.4 billion.
More merger activity is expected this year. Now that Columbia/HCA, OrNda and Healthtrust have substantial blocks of hospitals, they'll be in a position to swap facilities to gain strength in key markets.
Other findings. For the second consecutive year, the survey requested financial data on community benefits provided, defined as the costs, not charges, of providing charity care, non-billed services, research, education and training of healthcare professionals, and cash donations to community agencies.
The 82 systems that reported community benefits data provided an average of $26.7 million per system in 1993, an 11.8% increase from $23.9 million in 1992. Last year, 72 systems reported community benefits.
Leading the way were the 11 systems representing the "other religious" category, which provided average community benefits of $60.1 million per system, or 13.2% of net patient revenues.
Next were the 28 Roman Catholic systems, which provided an average of $36.8 million per system, or 5.3% of net patient revenues.
Five reporting public systems provided an average of $17.7 million each in community benefits, or 7.6% of net patient revenues.
Group practices. The 95 systems reporting data on group practices saw a 53.6% increase in group practices owned or managed to 771 in 1993 from 502 in 1992. Of the 95 systems, 84 systems said their groups represented 24,282 physicians, a 14% increase from 1992. Last year, 78 systems reported group practice figures.
The 54 reporting secular not-for-profit systems led the way with a total of 351 groups in 1993, a 73.8% increase from 1992.
Bad debt. Bad debt for the 159
systems reporting such data averaged 5.1% of net patient revenues in 1993, a 2.3% decrease from 5.2% in 1992.
All sectors were able to reduce their bad debt except for public systems, which experienced a 22.7% increase in bad debt to 7.9% of net patient revenues in 1993 from 6.4% in 1992.
Charity care. While systems did a better job in collections, charity-care expenses rose to 5.1% of net patient revenues in 1993 for 153 reporting systems, compared with 4.7% in 1992.
As expected, public systems had the highest total of charity care as a percentage of net patient revenues, 32.4%. Secular not-for-profits averaged 4.2%, other religious systems averaged 3.8%, Catholic systems averaged 3.2%, and for-profit chains averaged 0.6% in 1993.
Insurance premiums. For the first time, the survey collected financial data on systems' insurance activities. A total of 23 systems reported they collected $2.6 billion in insurance premiums in 1993, a 25.8% increase from 1992.