Experts disagree on whether hospitals are investing their cash too conservatively, but it's clear that they're earning a sizable sum.
Not-for-profit hospitals generated $2.8 billion in investment income in 1994, according to HCIA, a Baltimore-based healthcare information company. The total is based on figures from 3,330 not-for-profit hospitals.
Investment income can be an important source of revenues for hospitals, which have few restrictions on how they can invest their cash.
Since not-for-profit hospitals are tax-exempt, they don't pay taxes on the investment income regardless of whether they buy stocks, bonds or physician practices.
Hospital chief financial officers traditionally invested their cash in risk-free Treasury bills, which typically provide lower returns. But that's changing.
Hospitals increasingly are turning to external money managers, according to the Investment Management Institute in Greenwich, Conn. The survey reported that 52% of hospitals now use a local bank or broker to manage their funds.
For some hospitals, investment income can be the difference between a profit and a loss, said Alan Seidner, president of Seidner & Co., a Pasadena, Calif.-based company that invests for tax-exempt hospitals.
"For a lot of hospitals, if they didn't have interest income they would have a serious cash-flow situation," he said.
Investment income usually shows up in the difference between a hospital's operating profit margin and total profit margin. In 1994, hospitals had a total profit margin of 5.4%, according to the American Hospital Association. However, their operating margin-the amount made on patient-care operations-was a thin 0.2%, the AHA reported (July 3, p. 4).