Surplus. Excess revenue. Money to reinvest in service to the community. Call it anything but profit.
But, hospitals are generating more of it than ever before. They don't want to talk about it because they're afraid someone will take it away.
Having a good year creates additional problems unlike those faced by companies in other industries, whose financial success is cause for celebration. Well-to-do hospitals face employee morale problems, negative press, public misperceptions and discount-hungry payers.
While some hospitals and hospital groups have recognized the benefits of being forthright about earnings, others would rather complain about Medicare and Medicaid cutbacks and managed-care discounts while watching their fund balances hit all-time highs.
"Hospital profit margins have been increasing," said Donald Young, M.D., executive director of the Prospective Payment Assessment Commission, which advises Congress on hospital Medicare payment policies.
Dr. Young attributed rising profits to the ability of hospitals to control their costs of late, as well as continue their practice of billing private payers for Medicare and Medicaid shortfalls.
"The capacity to cost-shift has made up for losses and allowed profit growth," Dr. Young said.
In 1992, aggregate profits earned by acute-care hospitals across the country hit $11.9 billion, up nearly 19% from 1991's total of $10 billion, American Hospital Association data reveal. The 1992 mark is the highest one-year profit total since at least 1983 (See chart, right).
And, according to ProPAC's June report to Congress, hospitals in every bed-size, ownership and geographic category posted aggregate profit margins in the black in 1992.
The AHA's own figures reveal that the percentage of hospitals with negative total profit margins has edged downward to 24% in 1992 from 28% in 1987.
The AHA's hospital revenues and expenditures data for 1993 won't be available until later this year, but based on its monthly survey of a sampling of hospitals, aggregate profits could rise more than 13% to $13.5 billion. If so, that would be the fifth consecutive year of double-digit jumps in profits.
Hospital profit margin figures from a number of other financial reporting services have documented increasing profitability (Oct. 25, 1993, p. 60).
The AHA doesn't publish aggregate hospital profit figures, but it does release aggregate hospital revenues and expenditures in its annual hospital statistics book. Data in the book are based on the AHA's extensive annual survey of all hospitals. The most recent figures come from the survey responses of 5,292 acute-care hospitals.
Bad timing.The enviable earnings come during a period in which the AHA and other hospital trade groups are lobbying against proposed cuts in Medicare spending growth to help fund national healthcare reform.
The AHA has sounded the alarm with two commissioned studies from Lewin-VHI, the Fairfax, Va.-based research firm that's gained some notice of late for often reaching conclusions that support the research sponsor's policy positions (Aug. 1, p. 28).
On April 11, the AHA produced a Lewin study that said Medicare under President Clinton's reform plan would pay hospitals just 71 cents for every $1 it cost them to provide inpatient care to beneficiaries by the year 2000.
In 1992, Medicare paid hospitals 89% of their cost of providing inpatient care to beneficiaries, ProPAC said in its June report to Congress.
The AHA rang the bell again last month with the second Lewin study, which said Medicare would pay hospitals just 67 cents on the dollar by the year 2000 under the reform plan passed by the House Ways and Means Committee (July 18, p. 16).
AHA executives and lobbyists surrounded each study with claims that such Medicare spending reductions could force hospitals to pare their work forces, eliminate medical services, curtail community health programs and perhaps even shut their doors.
"The data show that reductions like these, with no accompanying reform steps such as expending healthcare coverage, could cause significant financial losses for hospitals," said AHA President Richard Davidson in testimony April 12 before the Senate Finance Committee.
Changing tunes.Ironically, the AHA's attempt to link Medicare profit margins with hospitals' overall profit margins is the opposite of the association's approach in the mid-1980s, when a series of reports by HHS' inspector general's office disclosed that hospitals scored big from Medicare during the early years of PPS.
In testimony before the Senate Finance Committee's health subcommittee in February 1986, the AHA said the inspector general's reports were "misleading and inaccurate." The AHA said the reports "sharply conflict" with AHA data, which show that hospitals' patient-care margins were significantly smaller. "Although hospital profits increased in 1984, this trend most likely will be temporary," the AHA said.
The association also relied, in part, on data from ICF, a Washington-based consulting firm, that said more than half the nation's hospitals would run operating deficits by 1988 because of underfunding from Medicare. ICF merged with Lewin in 1987.
That was then.The issue the AHA takes up with policymakers in Washington is whether Medicare is a fair payer, said Richard Pollack, the AHA's vice president of federal relations. The typical response is no, he said, because most policymakers realize Medicare hospital payment rates are dictated by federal budget negotiations rather than discussions about what payment rates should be.
"When hospitals' overall margins appear to be healthy, does that raise questions? Yes," he said. "Does it raise questions to the point that we don't have a legitimate case to be made? No."
Even if it did, hospitals' aggregate profits are not a good measure of the industry's financial strength because they're relatively small when compared with total hospital revenues and expenditures, Mr. Pollack said.
"We don't run into people who say profits are unreasonable," he said.
Well, maybe not.
After the AHA ran a series of newspaper ads late last month telling of the horrors that would befall hospitals and their patients if the House Ways and Means Committee's Medicare spending cuts in its reform legislation were implemented, two congressmen responded with the AHA's own data.
In a July 20 letter to their congressional colleagues, Rep. Sam Gibbons (D-Fla.), chairman of the committee, and Rep. Fortney "Pete" Stark (D-Calif.), who chairs the committee's health subcommittee, said hospitals can absorb slower rates of increases in Medicare payments without harming patient care.
"Despite the fact that almost 40% of hospital beds are empty, profit margins in the industry are at higher levels now than they have been over much of the last two decades," they said.
No relationship.At least historically, there doesn't seem to be any significant correlation between hospitals' PPS margin, or profitability on Medicare inpatients, and their operating and total profit margins, which take into account all patients and sources of revenues.
In 1986, hospitals' PPS margin was 9.9%, according to ProPAC, and their operating and total profit margins were 0.7% and 5.1%, respectively. By 1993, hospitals' PPS margin dropped to an estimated -5.0%, but their operating and total profit margins were 0.5% and 5.5%, respectively (See chart, this page).
Cost-shifting.The findings contradict the age-old cry from the hospital industry that hospitals' ability to charge private payers for Medicare and Medicaid payment shortfalls is limited because of such things as fixed-payment contracts, per-diem and capitated reimbursement, and discounted payment arrangements.
That may turn out to be true in the future, but until now hospitals have cost-shifted their way to record profits.
In 1990, hospitals charged private payers $1.28 for every dollar they spent on patient care to make up for Medicare and Medicaid payment shortfalls and for uncompensated-care costs, according to ProPAC.
By 1992, hospitals were charging private payers about $1.31 on the dollar, even though their Medicare shortfalls essentially were unchanged between 1990 and 1992. Medicaid shortfalls fell to just 9 cents on the dollar in 1992, from 20 cents on the dollar two years earlier.
Another way to look at it is to examine deductions from hospitals' gross revenues to adjust for discounts and Medicare and Medicaid losses.
According to the AHA, such deductions totaled $152.4 billion in 1992, or more than 38% of hospitals' gross revenues. That's up from $126.2 billion, or more than 36% of hospitals' gross revenues, in 1991 (See chart, p. 126). But hospital profits jumped 19% between 1991 and 1992, indicating they were more than able to make up the difference from other revenue sources.
Nonoperating revenues.However, many hospital industry representatives warn against looking at other revenue sources to gauge hospitals' financial status. They say such sources are highly variable and can't be depended upon.
The fact is, aggregate hospital revenues from operations other than patient care and from nonoperating sources have been remarkably consistent over a 10-year period starting in 1983. Revenues from operations other than patient care include money from gift shop and parking garage services. Nonoperating revenues include money from investments and donations.
In 1986, hospital revenues from those sources were $10.6 billion, which represented 7.1% of hospitals' total revenues. In 1992, revenues from the same sources climbed to $18.4 billion, but that still represented 7.1% of total revenues (See chart, p. 126).
Uncompensated care.One factor behind the surge in profitability is hospitals' uncompensated-care burden.
In 1985, hospitals' aggregate uncompensated-care costs were $7.6 billion, which represented 5.8% of their total expenses, according to the AHA. Uncompensated-care costs include hospitals' bad-debt and charity-care costs. It doesn't include special subsidies hospitals may receive locally for providing care to the indigent.
By 1992, hospitals' aggregate uncompensated care costs grew to $14.7 billion, but that represented just 5.9% of hospitals' total expenses. In fact, hospitals' 1992 share of total expenses devoted to uncompensated care was the lowest since 1985 (See chart, p. 116).
Eyebrows raised.Mr. Pollack rebutted the suggestion that the industry cries poor and that its representatives in Washington talk about negative things of their own volition.
"We're driven by a process in which people say, `Tell me what bad things will happen if we do X, Y and Z.' That's what they want to know," he said.
And, he said, the AHA doesn't use the profit margins of other healthcare industry segments against them.
But the fact that the hospital industry has posted successive banner years hasn't gone unnoticed by other special interests in Washington that are lobbying for their own favorable terms under healthcare reform.
The Blue Cross and Blue Shield Association hasn't targeted hospital earnings directly but is lobbying for a concession that could have a direct effect on hospitals' financial well-being.
In testimony twice before Congress this year, the BCBSA urged Congress to apply the same tax rules to not-for-profit hospitals that venture into the insurance business that apply to other health insurance plans.
In preparation for national healthcare reform, many hospitals are forming integrated delivery systems that have insurance components to capture groups of potential patients as well as generate insurance premium income.
"Whether a hospital is profitable or not is between the hospital, the IRS and the community," said Paul Dennett, BCBSA's executive director of congressional relations. "But when the hospital leaves its mission and gets into the insurance business, that income should be treated like unrelated business income and taxed."
Interestingly, Blue Cross and Blue Shield plans across the country posted their highest aggregate profits last year since 1985. They earned $2.6 billion on total premium revenues of $71.2 billion (May 2, p. 38).
The Health Insurance Association of America is aware of the hospital industry's high profits, but the insurance trade group doesn't do any finger-pointing, said Faith Williams, the HIAA's vice president of federal affairs.
"Our position is that there's a number of reasons for the nation's healthcare cost problems, and you can't lay the blame at one source," she said.
Although the HIAA claims not to use it on Capitol Hill, it has produced a handy chart comparing insurance company profit margins with those of other healthcare sectors from 1980 through 1991. The chart shows that the HIAA's largest 20 insurance members had lower profit margins than hospitals, pharmaceutical manufacturers, Blue Cross and Blue Shield plans, and HMOs.
States open books.While hospital industry representatives in Washington continue to beat the same drum, hospital associations in many states are coming to terms with their members' profitability and are trying to take a proactive approach to handling all the baggage that comes with it.
Other associations, though, have ceded the release of hospital data to state agencies with mixed results (See related story, p. 122).
For years, the Iowa Hospital Association published an annual report on the status of the state's hospitals. The reports included everything except data on revenues and expenditures, which would have allowed a calculation of profits.
Past efforts by MODERN HEALTHCARE to obtain such financial data were unsuccessful.
But after Donald Dunn, who had been the IHA's president since 1970, retired in 1992, the association took a different approach. Last year, the IHA released its first report containing hospital profit data. The 1994 report, released in January, included hospital-specific profit data.
The latest report, which includes 1992 numbers, said Iowa's 120 hospitals earned $95.8 million on total revenues of about $2.8 billion for a 3.5% total profit margin (See chart, p. 128).
"We decided to compile the data because it's publicly available anyway," said Stephen Brenton, who took over as IHA president in November 1992. "We had a couple of dissenters, but we told them public accountability is something we have to deal with."
Leading Iowa's 120 hospitals down the road of public accountability has served the association well, Mr. Brenton said, because it's increased the IHA's and its members' credibility with purchasers and the state government.
"It shows that we're not trying to hide anything," Mr. Brenton said. But, he added, the onus now is on the IHA to continually educate the public that a modest profit for hospitals, even not-for-profit hospitals, is essential to maintaining their financial viability.
Mr. Brenton said the IHA conducted a survey of its membership to get feedback on the new data-release policy, and he said only one hospital objected.
Who, us?Three out of four Iowa hospitals contacted by MODERN HEALTHCARE turned down requests to comment on how the IHA's new reports affected them and on how they handle their financial success. Spokespersons for two hospitals said their chief executives were unavailable or uncomfortable discussing the issues, and a spokesperson for the third said the facility had the bottom drop out in 1993.
Happy to discuss its success was the Iowa Methodist Health System, which operates 584-bed Iowa Methodist Medical Center in Des Moines.
In fiscal 1993, which ended July 31, 1993, Iowa Methodist earned about $12.1 million on total revenues of about $213.2 million. The "amount to reinvest in capital and new programs to improve patient-care services" equaled a 5.7% total profit margin.
"We support what the IHA is doing," said Jim Skogsbergh, president of the medical center. "It's consistent with our philosophy."
The hospital historically has disclosed its financial results in an annual report released to the public.
Mr. Skogsbergh attributed the hospital's financial success to its medical staff, which attracts patients as well as managed-care contracts, and its middle management, which is highly cost-conscious.
Bill Miller, Iowa Methodist's chief financial officer, also said the hospital is able to make a profit from most of its managed-care contracts because of its sophisticated cost-accounting system, which tells the hospital how low it can go on a contract and still turn a profit.
The hospital also is successful despite posting $76.1 million in contractual adjustments in 1992, according to the IHA report. That includes $45.8 million in Medicare payment shortfalls and an $8.3 million loss on Medicaid. The Medicare and Medicaid losses were the differences between payments from those sources and hospital charges, not costs.
"If we were wildly successful, we'd get questions from employees and payers," Mr. Skogsbergh said. "As long as profits aren't unreasonable, and we're offering competitive pay adjustments to employees and reasonable prices to payers, we won't have a problem."
Old news.Colorado's 69 acute-care hospitals posted a 6.9% total profit margin last year, said a report released by the Colorado Hospital Association in May, and not many people noticed, said Larry Wall, the CHA's president. That's because it was the fifth consecutive year that the CHA disclosed the data, and it's now "old news," he said.
It was big enough, however, to make the front page of the Denver Post in a May 10 article.
"Colorado hospitals are posting their highest profits of the past five years, despite brutal competition. They're doing so by keeping prices high and expenses low, and scrambling to generate funds from cafeterias, parking garages, medical office buildings, investments and other services outside of patient care," the article stated.
But by May 11, it was old news, and the people most interested in the report were librarians, Mr. Wall said.
Mr. Wall said the CHA made the decision in the mid-1980s to help its hospital members become more publicly accountable, and that included the release of hospital-specific data.
"Not releasing it creates more problems," Mr. Wall said. "It creates the misperception that we're probably trying to hide information."
In fact, Colorado hospitals should be proud that they've maintained their financial health and have positioned themselves to meet the challenges of healthcare reform, he said.
Acute-care hospitals in the state earned $227.7 million on net operating revenues of about $3.2 billion last year, the CHA reported (See chart, p. 128).
The release of the information and the profit levels themselves haven't hurt the CHA in terms of lobbying for more favorable Medicaid reimbursement from the state, Mr. Wall said.
In its latest report, the CHA said Medicaid paid Colorado acute-care hospitals about $236.4 million less than billed charges and about $40.7 million less than actual costs. That translates into reimbursement of about 89 cents for every dollar spent on recipients, or about two cents less than hospitals received nationally in 1992.
Know your competition.Any problem caused by the CHA's public release of hospital-specific financial information is more than offset by several benefits, said Kathy Bartilotta, vice president of strategic services for 312-bed Lutheran Medical Center in Wheat Ridge, Colo.
The benefits include obtaining financial data about competitors and providing marketing opportunities to those hospitals that "show well" in the report, she said.
"We don't like to brag about ourselves, so it's nice to have a third party say it," Ms. Bartilotta said.
Lutheran earned $12.5 million on net operating revenues of about $135.9 million in 1993, posting a 9.2% total profit margin compared with the statewide total profit margin of 6.9%. But it had average inpatient charges of $8,084 per stay vs. $11,707 for all hospitals in the Denver area.
One side effect of the CHA's report is that payers have access to the same information and, if the hospital is profitable, they'll want bigger discounts, said Neil Bertrand, Lutheran's vice president of finance.
"Our philosophy is discounts are earned, not given," Mr. Bertrand said.
Like Mr. Brenton in Iowa, Ms. Bartilotta and Mr. Bertrand said the trade-off to releasing hospital-specific financial data is the responsibility to educate the public about the need for not-for-profit hospitals to make money.
To date, it appears that Colorado employers have bought the arguments.
Hospital profit levels didn't surprise Colorado and Denver-area employers, said Bill Lindsay, a principal in The Lindsay-Sandbak Group, an employee benefits consulting firm in Denver. He's also a member of the Colorado Business Coalition on Health.
Mr. Lindsay said employers are aware that hospitals are reducing their operating costs in anticipation of increased price competition in the future and that such reductions have resulted in higher short-term profits.
"So far the savings haven't translated into lower prices," he said.
Employers, particularly those that have enjoyed more moderate healthcare cost increases recently, have been patient with hospitals, Mr. Lindsay said. But, he warned, employers' patience isn't eternal, and they'll be quick to turn on hospitals in the future unless they see some corresponding improvements in price.
Up to speed.Meanwhile, hospitals in Texas and New Jersey are following their respective state associations into the data age, reluctantly unmasking their true profitability.
With the support of the Texas Hospital Association, the Texas Legislature passed a law making public all hospital-specific financial data collected by the state health department.
The law took effect last September, but hospital-specific data likely won't be released for several years because the state is behind on releasing aggregate hospital statistics. The latest available data are from 1991.
"Texas is a conservative state, but we're getting to the point that we all recognize the value of good information," said James Houdek, the THA's senior vice president of healthcare finance.
He said many hospitals are anxious to get their hands on data from other hospitals in their market.
Presently, the THA surveys its hospital membership on behalf of the American Hospital Association and the Texas Health Department. The survey instrument is the AHA's annual hospital survey plus a few additional questions posed by the state.
According to the Texas health department, the 466 acute-care hospitals in operation in Texas in 1991 enjoyed a total profit of $761.8 million on total revenues of about $15.9 billion (See chart, p. 132). That's a Texas-sized jump in profits of nearly 19% over 1990 levels.
That's also a 4.8% total profit margin. Nationally that year, hospitals' total margin was 4.3%, the AHA says.
The boss.In New Jersey, the board of the New Jersey Hospital Association in April approved a plan to release hospital-specific financial data to the public. The first release could occur as early as next year, said NJHA President Gary Carter.
"I went to the board and said if we don't publish it, someone else will," Mr. Carter said. "It's better to tell your own story rather than reacting to someone else's."
That someone already is the New Jersey Health Care Facilities Financing Authority, through which New Jersey hospitals sell their revenue bonds. Hospitals aren't required to provide data to the authority unless they use the authority to issue bonds.
Still, 82 of the state's 84 acute-care hospitals report data to the authority whether it's required or not. Hospitals that report data receive comparative statewide and peer group data from other hospitals, creating the incentive to voluntarily submit their financials.
Hospital-specific data are confidential, but the authority does release aggregate figures upon request.
The 82 hospitals that supplied data to the authority posted a $500.9 million profit on net operating revenues of about $9.7 billion last year. That's a 5.2% total profit margin.
MODERN HEALTHCARE asked the state's largest health insurer, Blue Cross and Blue Shield of New Jersey, about the fact that hospitals in the state enjoyed a profit of more than half a billion dollars last year, but a plan spokeswoman said the insurer was unaware of the profit figure and declined comment.
The $500.9 million in profits represents a 33% increase in earnings in 1993, which was the hospitals' first year out from under the state's rate regulation system (See chart, p. 132).
Good intentions aside, it's tough to teach an old industry new tricks.
In April, four months after New Jersey hospitals completed their first year out from under the thumb of rate regulation, the NJHA released a report that said uncompensated-care costs, Medicare and Medicaid shortfalls, and discounted payment arrangements with managed-care plans are "placing New Jersey's hospitals at serious financial risk."