Hospitals are adjusting their costs to reflect the growth of outpatient services and shorter inpatient lengths of stay, a strategy that delivered another increase in their profits in 1993.
Hospital operating profit margins increased to 3.02% in 1993, compared with 2.84% in 1992, according to the 1995 edition of The Sourcebook, compiled by HCIA, a Baltimore-based healthcare information company, and Deloitte & Touche, a national accounting firm. The Sourcebook includes data from the Medicare cost reports of 4,579 hospitals.
The profit-margin increase continued a five-year trend of slight boosts in profitability.
Although rising just a few tenths of a percent some years, those increases add up. Since 1989, operating profit margins have more than doubled, according to HCIA figures. They were 1.39% in 1989.
Total profits, which include nonoperating income from investments and other activities, also went up, but less dramatically. In 1993, total profit margins were 4.23%, compared with 4.22% in 1992. "Interest income was off," noted Steve Renn, HCIA's managing director.
During the past five years, hospitals' total profit margins rose 37%, HCIA
In sorting out profit winners, investor-owned hospitals are doing better than not-for-profits, and rural hospitals are edging urban ones.
Investor-owned hospitals reported an operating profit margin of 5.39% in 1993, compared with 2.89% at not-for-profits, according to HCIA. However, Mr. Renn said, not-for-profits reported a higher case-mix adjustment, meaning that their patients required high-cost care.
For the second year in a row, rural hospitals reported a higher profit margin than urban facilities. Rural hospitals reported an operating profit margin of 3.19% and a total profit margin of 4.36%. Urban hospitals reported an operating profit margin of 2.91% and a total profit margin of 4.11%. Rural hospitals "have a higher degree of insulation from more competitive pressures," such as managed care, Mr. Renn noted.
Clearly, operations have been the key to hospitals' overall profitability. Hospital managers are operating facilities with fewer overnight patients in them, but they're apparently adjusting their resources to fit the services. Inpatient occupancy dropped 1.2 percentage points to 47.29%. However, hospitals reported that 32.97% of their revenues in 1993 came from outpatient services. That's up from 31.07% in 1992.
The number of full-time-equivalent employees, or FTEs, per 100 adjusted discharges fell for the first time in five years to 6.46, compared with 6.50 in 1992. Staffing levels increased at an average annual rate of slightly less than 1% between 1989 and 1992.
However, as hospitals tinker with their skill mix on nursing units and implement work redesign, salary-and-benefit expense per FTE is becoming a more important gauge of hospital efficiency. HCIA reported that hospitals experienced a 6.1% increase in salary-and-benefit expense per FTE. That's down from annual increases of 7% or more between 1989 and 1992, HCIA said.
Not surprisingly, hospitals that control their labor and overhead costs are doing better. The hospitals in the 75th percentile in performance actually lowered the portion of their revenues spent on overhead, salaries and benefits, according to HCIA. Those hospitals-which had an average operating profit margin of 6.55%-reported spending 38.10% of their revenues on overhead in 1993, down from 38.72%.
In addition, they reported spending 56.30% of their revenues on salaries and benefits in 1993, down slightly from 56.38% in 1992.
Overall, hospitals are adjusting to a higher turnover rate of inpatients, according to HCIA data. Although lengths of stay are dropping, hospitals are using those beds for more patients who generate more revenue on average.
For example, discharges per bed-which stayed about the same from 1989 to 1991-increased in 1992 and went up even more in 1993. In 1993, hospitals reported 34.82 discharges per bed, up 2% from 1992. However, that 2% increase in a 117-bed hospital-the nation's average-accounted for 62 more patients using the hospital, where most expenses are fixed.
Using HCIA's gross revenue per adjusted discharge figures, those 62 additional patients at the average hospital amounted to $427,100 in added 1993 revenue.