Does Wall Street know something about the financial performance of healthcare organizations that industry executives haven't figured out?
Mutual funds and other institutional investors are increasing their holdings and giving rave notices to the U.S. medical-care system. The fact that healthcare stocks zoomed 40% in 1995 is a sign to investors that healthcare businesses are doing something right.
It should come as no surprise that those who follow financial matters see healthcare as a thriving enterprise. As we reported in our March 11 issue, investors recognize that healthcare service companies are achieving profits through consolidation and restructuring, and they respond by buying stocks.
But while the investor-owned sector is drawing interest, its not just Columbia, Tenet and Quorum that are doing well. You don't have to be a financial guru to take notice of some recent robust industry benchmarks:
In 1994, acute-care hospitals generated a record-setting $13.8 billion in aggregate profits-up 17.3% over profits in 1993, according to American Hospital Association data. That resulted in a total profit margin of 4.7%.
Other AHA data show the amount of money spent by hospitals to care for the poor dropped in 1994 for the first time in more than decade-a development that no doubt helped fuel hospitals' strong profit margins.
Additionally, the number of acute-care hospitals that closed fell for the sixth consecutive year-to just 17 in 1994 from 34 in 1993. That's just one-fifth the number that closed in 1988.
Savvy hospital administrators have learned how to operate under Medicare's prospective payment system, government data show, earning average PPS margins of 3.4% in 1994 by cutting costs per discharge by 0.5%.
Despite all this good news, many industry executives appear caught up in perpetual pessimism. Their misery appears to be more indicative of the struggle to keep up with constant change than a reflection of financial problems, however.
No doubt they have legitimate concerns about what the future will bring. Medicare now is a more generous payer than managed-care plans, and Congress is poised to make serious cuts in budgeted Medicare and Medicaid spending.
Regardless, we recommend executives put an end to the whining. No matter what the government and the market have thrown at you, for the most part you've figured out how to respond. And there's sufficient money in the system for reducing duplication of services, aligning all the appropriate incentives, and refocusing on preventive care and wellness. Take a bow for the good work you've done. You might even want to expand your healthcare stock holdings.