As it pushes to increase its operating profit margin, OrNda HealthCorp executives last week said they may reduce the number of contracts with vendors who manage departments in its hospitals."We're looking at all of our contract management," said Keith Pitts, chief financial officer for the Nashville, Tenn.-based chain of 48 hospitals in 14 states. "We have not done as good a job as a company looking at that." Although Pitts didn't disclose how much OrN da spends on contract management, he said the chain's hospitals have dozens of contracts with vendors in food service, pharmacy, housekeeping, psychiatric services, rehabilitation services and skilled-nursing units.Discussion abou t o utsourcing hospital departments came as OrNda officials last week reported a big jump in second-quarter profits. The report lifted its stock price by $2.13 to $28.88 in New York Stock Exchange trading on March 27, when the earn ings were announced.For the quarter ended Feb. 29, OrNda reported a 41% increase in net income to $27.5 million, or 46 cents per share, compared with $19.4 million, or 43 cents per share, in the year-ago period. Revenues grew 23% to $5 42.9 million. For the six months, the company reported a 46% increase in net income to $47 million, or 86 cents per share, compared with $32.3 million, or 72 cents per share, in the year-ago period. Revenues increased 20% to $1 bil lion.Despite the strong growth in profits, OrNda officials believe they can increase profit margins at their hospitals by examining whether their facilities could better manage many hospital departments themselves. Hospitals hire c ontract management vendors because of their expertise in a certain area. Frequently, the managers help hospitals keep a lid on costs, but the outside vendors also may reap significant profits from those contracts. Between 1 993 and 1994, the number of hospital contracts in force grew 12% to 8,773, according to MODERN HEALTHCARE's 1995 Contract Management Survey (Sept. 4, 1995, p. 67).By trying to rein in those profits, OrNda is responding to pressure to incre ase its EBITDA margin, an important measure to Wall Street. That margin, which was 16% in the second quarter, lags behind the 20% margin of industry leader Columbia/HCA Healthcare Corp., according to Robinson-Humphrey Co., an Atlan ta-based investment bank. EBITDA margins also are referred to as operating margins; they measure earnings before interest, taxes, depreciation and amortization compared with revenues.Last week, Tenet Healthcare Corp. repo rted third -quarter earnings and an EBITDA margin of 19.5% (See related story, p. 8). Investor-owned margins typically are much higher than those of tax-exempt hospitals, which average 12%, according Alex. Brown & Sons, another inv estment ban k based in Baltimore.To get a better idea of how it is spending money on contract managers, OrNda is breaking out the supply and labor costs on its balance sheets. For example, OrNda contracts with Houston-based Owen He althcare for pharmacy management at 16 of its hospitals. Previously, it reported Owen's contracts as operating expenses, but beginning with the second quarter it began separating how much was spent on supplies, such as drugs, and labor in thos e contracts."The more we have the data broken down, the more we can manage it on a comparable basis," Pitts said.
THE WEEK IN HEALTHCARE;ORNDA TO STUDY IMPACT OF HOSPITAL VENDOR CONTRACTS
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