The so-called "Hillary effect" was very, very good to hospitals.
In 1994, the year the country engaged in an historic debate over national healthcare reform, acute-care hospitals generated a record-setting $13.8 billion in aggregate profits, according to data released by the American Hospital Association on March 15.
That represents a 17.3% leap in aggregate profits from 1993's earnings of $11.7 billion. It also represents a big rebound in hospitals' aggregate profit margin, which dropped to 4.2% in 1993 from 4.6% in 1992 before jumping back to 4.7% in 1994 (See chart).
The 4.7% profit margin in 1994 was the highest since 1986, when hospitals turned a 5.3% profit on their revenues.
The stellar performance was due in large part to better cost-control, which came in vogue as a result of the healthcare reform debate.
The AHA's figures are based on financial data reported to the association by 5,229 acute-care hospitals. The AHA publishes the results in its annual hospital statistics book, although expenses and revenues are reported separately. MODERN HEALTHCARE extrapolated the profit figures from the book.
The results could play a part in the ongoing debate over proposed reductions in budgeted spending on Medicare and Medicaid. But Richard Wade, the AHA's senior vice president for communications, said the hospital industry's financial performance in 1994 should have nothing to do with Medicare and Medicaid budget decisions.
"Congress should not be making payment decisions based on the financial results of individual institutions," he said, adding that "those payment decisions should be based on what constitutes fair and adequate reimbursement for services."
Still, the AHA has argued in the past and in the most recent Medicare and Medicaid budget debate that extensive reductions in budgeted spending on both programs could force some hospitals to curtail services or even close.
Driving the surge in hospital profitability was the factor that the industry has been puffing its chest out about for the past two years: low growth in hospital expenses. Total hospital expenses grew just 3.6% in 1994 to about $275.8 billion, according to AHA figures. That's less than half 1993's expenditure increase of 7.3%.
The for-profit sector of the hospital industry did even better. The total expenditures incurred by the more than 700 investor-owned hospitals in the AHA's sample rose only 1.6% in 1994 to about $23.4 billion from about $23.1 billion. By comparison, the total expenditures incurred by the more than 3,000 private not-for-profit hospitals in the survey increased 3.6%, matching the industrywide expense increase.
The AHA doesn't publish revenue figures for the investor-owned sector in its annual hospital statistics report. Although hospitals are required to report expenses to the AHA, they're not required to report revenues. Wade said only about 40% of the for-profit hospitals in the survey report revenues, and the association subsequently doesn't have enough confidence in those numbers to release them. Consequently, the profits and profit margins of the investor-owned sector aren't available.
The AHA, though, does publish the revenue figures for private not-for-profit hospitals. That segment of the industry posted a $9.4 billion profit in 1994 on total revenues of about $213.7 billion. That represents a 4.4% profit margin, up from 4% in 1993.
The hospital industry's ability to control costs, not generate additional revenues, also has been cited as the reason behind higher hospital Medicare profits in 1994 (Dec. 18-25, 1995, p. 2).
But, as AHA data reveal, there's more to the story than lower expenditure growth. Growth in hospital revenues did slow, but not as fast as expenses. That combination allowed the industry to post the big profit numbers. In 1994, aggregate hospital revenues rose 4.2% to about $289.6 billion, compared with a 6.9% increase in 1993.
Some healthcare observers have attributed 1994's slower revenue and expenditure growth in the industry to that year's push for national healthcare reform led by first lady Hillary Rodham Clinton. They theorize that the mere threat of national healthcare reform prompted providers, suppliers and insurers to be on their best behavior lest they give reform-backers more ammunition for their cause.
Physicians, for example, saw their average net income fall for the first time in 1994, according to the American Medical Association. Physicians' average net income dropped 3.6% that year to $182,400 (Jan. 1, p. 10).
Others, though, give less credit to industry behavior and more credit to the state of the overall economy (Jan. 16, 1995, p. 2). While the Consumer Price Index, or overall inflation, climbed 2.7% in 1994, consumer price inflation for medical services fell to just 4.9% that year-the smallest increase in prices for medical services since 1972.
On the utilization front, inpatient business continued its downward slide in 1994, AHA figures show. Total admissions held steady at about 30.7 million, but hospitals' average daily census dropped 4% to 568,000 patients. Total inpatient days dropped 4% to about 207.2 million, and the average length of stay dipped to 6.7 days from 7 days in 1993, the AHA reported.
Hospital outpatient visits, meanwhile, climbed 4.4% to 382.9 million in 1994.