What financial crisis?
If the U.S. hospital industry is in a downward spiral toward fiscal ruin, as some analysts have predicted for a decade, William O. Cleverley hasn't seen any evidence of it. Cleverley, president and co-founder of the Center for Healthcare Industry Performance Studies, a Columbus, Ohio-based healthcare information company, remains bullish on the industry, and with good reason.
According to the 1996-97 Almanac of Hospital Financial and Operating Indicators, authored by Cleverley and published by CHIPS, the hospital industry's financial condition has never been better. The five-year review and forecast of hospital performance shows that overall profitability has improved and, despite pricing pressures, hospital executives have kept costs under control.
In 1995, the industry's total profit margin increased to a median 4.9% from a four-year range of 3.8% to 4%. And, contrary to what might be expected, the total profit margin of hospitals in markets with high managed-care penetration increased to a median of 4.5% in 1995 from 3.6% in 1994.
"It clearly shows that you can, in fact, do quite well even in heavy managed-care markets," said Cleverley, who's also a professor of hospital and health services management and policy at Ohio State University.
The newly published report is based on audited financial statements from 3,800 voluntary not-for-profit hospitals, operating performance data from 2,300 voluntary hospitals and Medicare cost reports from 6,100 for-profit and not-for-profit hospitals.
CHIPS also compiled an average income statement for the industry using a sample of not-for-profit hospitals. From 1991 to 1995, the average hospital's profit grew 14.1% annually to $4.5 million on total operating revenues of $79.4 million (See chart).
Price-level-adjusted return on investment, the primary measure of profitability CHIPS uses, "spiked upward" to 10.2% in 1995 from an average of about 9.5% in the prior four years.
Cost reduction has been a major contributor to profitability, Cleverley said. In 1995, cost per discharge adjusted for wage index and case mix dropped to $5,174 from $5,194 in 1994.
The report also shows improvement in liquidity. Median days' cash on hand rose to 100 in 1995-a five-year high-from 92 in 1994. Meanwhile, the percentage of hospital assets financed with debt declined to 45% in 1995 from a median of 47% in the previous four years.
"A decline of this magnitude on an industrywide level is quite remarkable," the report noted. Hospitals' reduced reliance on debt financing is a function of declining capital spending and increased profitability, it said.
However, the report shows a widening gap between "high-" and "low-performance" hospitals. The lowest performers, based on price-level-adjusted return on investment, "have shown a marked deterioration in their financial flexibility during the past several years, and a significant percentage of these hospitals could be forced to discontinue operations in the future," the report warned.
Low performers posted a median price-level-adjusted return on investment of 5.6%, compared with 14.7% among the high performers. That's a difference of 9.1 percentage points, up from 6.1 points in 1994 and 2.9 points in 1991.
Small urban hospitals are in the worst shape of any sector in the hospital industry, Cleverley noted. For example, small urban hospitals' median total profit margin of 1.7% is three percentage points below the median for all U.S. hospitals. Cleverley said he expects more mergers or affiliations of small urban hospitals with major facilities in their markets as well as outright closures and bankruptcies among those hospitals with significant debt.