A twister called managed care is ripping through the nation, uprooting hospital profit margins and piling up debt per bed.
Some hospitals are surviving and even thriving amid the upheaval, while weaker hospitals are wavering. Overall, though, not-for-profit hospitals in high managed-care markets are faring worse than those in markets outside the storm. That could affect hospitals' ability to pay off outstanding debt, a new study indicates.
The study, conducted for MODERN HEALTHCARE*by KPMG Peat Marwick, tracks managed care's path through low, medium and high managed-care markets by comparing 1994 median capital and operating indicators of not-for-profit hospitals in the top 50 metropolitan statistical areas ranked by level of HMO penetration (See chart, p. 114). Figures for the low, medium and high managed-care markets represent averages of those medians.
In the new study, KPMG used data collected for The Guide to Hospital Performance, published earlier this year. Predictably, the study shows that hospitals in high managed-care markets, on average, are less financially stable than hospitals in low managed-care marketplaces.
Overall, hospitals in high managed-care markets have less invested in property, plant and equipment, older assets, more debt per bed, lower liquidity and slimmer profit margins than those in markets with less managed care, said Michael S. Hamilton, a partner and national director of KPMG Peat Marwick's healthcare market segment in Long Beach, Calif. The study suggests managed care has deteriorated the financial position of hospitals in those markets, he said.
Managed care is reducing hospital costs, "but it's also putting hospitals at great financial risk," warned Paul J. Feldstein, a professor of economics and healthcare management at University of California at Irvine's graduate school of management. Feldstein analyzed KPMG Peat Marwick's summary of capital and operating indicators for MODERN HEALTHCARE.
In high managed-care markets, the median investment in net property, plant and equipment per bed is $139,828, and the average age of plant is 8.67 years. That compares with net property, plant and equipment investment per bed of $141,298 and median age of plant of 7.65 years in markets with lower HMO penetration.
The margins indicate hospitals in high managed-care markets aren't investing as much in capital and are letting physical assets age longer before replacing them, Hamilton said. "They've gotten out of the arms race in terms of who has to have the nicest facility," he said. Instead, they are investing in physicians and information systems.
"They're doing what we expect," Feldstein added. In high managed-care markets, "they're more reluctant to invest in hospitals."
Despite a lower median investment in capital assets, hospitals in high managed-care markets have piled up more debt per bed. Median debt per bed ranges from $169,587 in high managed-care territories to $148,328 in markets with low penetration. Hamilton believes the higher amount of debt per bed in high managed-care areas means more licensed beds have been taken out of service.
Measures of liquidity and creditworthiness also were weaker in high managed-care markets, and profits were lower.
For example, the "index of predicted credit," a measure developed by Baltimore-based HCIA to demonstrate hospitals' ability to repay debt, ranged from an average of 116.45 in high managed-care markets to an average of 119.87 in low managed-care markets. The IPC uses a base of 100.
While these scores aren't significantly different, Feldstein believes they bear out a pattern shown by the other indicators: that hospitals in high managed-care markets are not doing as well as those in markets with low managed-care penetration. "Some places could still do OK, but a lot of hospitals have to be very careful about taking on more debt," he said.
"If I were a hospital in a low-penetration market, I would be studying hospitals in high managed-care markets because this may be what's in store for me," Feldstein added.
As an example, Feldstein said Kaiser Permanente's decision not to invest in additional hospitals and to close hospitals or contract out inpatient care should serve as a sign of what's to come. "Other hospitals should realize they're not immune to these trends," he said.
Hospitals also should pay attention to what happens to Medicare after the November elections, Feldstein said. Because Medicare is such a major payer for so many hospitals, federal policy on future payments could affect hospitals' decisions on assuming debt, he said.
Feldstein acknowledged that consolidation is helping the industry's financial position. "The market power of those that survive will rise," he said.
On the other hand, the recent spate of investor-owned acquisitions of not-for-profit hospitals "masks the fact that these (not-for-profit) hospitals have deteriorating financial positions," he said. Until such consolidation occurs, "a lot of these not-for-profits may be in trouble."
However, Hamilton stressed that within high managed-care markets, a number of high-performing hospital systems have achieved greater profitability and higher liquidity than average. "The strong are not going to have any problem at all paying off debt," he said. "It's the second-tier players that are most at risk."