William Cleverley doesn't subscribe to the sky-is-falling scenario some people preach. The numbers tell him a different story.
Despite all the anecdotes of crushing losses on hospital operations, the industry as a whole remains quite profitable, he says. Total margins have continued to improve, reaching a median of 5.4% for all hospitals in 1997, according to the 1998-1999 Almanac of Hospital Financial and Operating Indicators. Cleverley is a professor at Ohio State University and president of the Center for Healthcare Industry Performance Studies in Columbus, Ohio, which publishes the almanac.
He concedes that it's a tough time for many hospitals, given price constraints in the market, and believes "times will get harder next year." That is particularly true for small urban hospitals.
CHIPS calculates medians for "high performance" and "low performance" hospitals. Those measures show a widening gap between strong and weak hospitals. But the industry generally has been able to manage the pressures through cost reductions. "Well-managed organizations will still rise to the top," Cleverley says.
His view of the healthcare world is shaped by three data sources culled by CHIPS. Audited financial statements from about 3,400 voluntary hospitals are used to crunch 35 financial indicators. Total margin is one of them. The center also develops 43 operating indicators-measuring profitability, price and utilization, for example-from annual surveys of 1,800 voluntary hospitals. Finally, CHIPS devotes one section of the almanac to a mixed set of financial and operating indicators derived from the Medicare cost reports of 6,000 for-profit and not-for-profit hospitals.
The almanac, which covers 1993 through 1997, contains median values for each measure and breaks out ratios by various classifications, including number of beds, amount of revenues, teaching status and region.
In the front of the almanac, CHIPS offers some general observations about the industry's health based on a constant sample of 1,500 not-for-profit hospitals. That sample reflects hospitals that have reported data for each of the five years covered by the report.
CHIPS observes, for example, that cost-control efforts might be peaking. Based on costs per discharge adjusted for case mix and wages, hospital costs have risen just 3.7% over the past five years, according to the report. But in 1997 alone, costs per discharge rose 2.1%. "If cost-control efforts have indeed peaked, future hospital profits could fall dramatically if pricing pressures resulting from the Balanced Budget Act of 1997 materialize," according to the almanac.
The law reduces projected Medicare outlays by $116 billion through 2002, with most cuts occurring between 2000 and 2002.
"I would expect that the numbers for 1998 will show a slightly larger increase in costs than may have been experienced in the past," Cleverley says.
While profits remain strong, CHIPS predicts more downward pressure. If the bull market cools off, for example, hospitals' stock market investments could decline, throwing off bottom lines that have been propped up by those earnings.
And what about provider losses on operations? CHIPS does not report operating margins because there is no standard method for determining what qualifies as income from operations. Should that figure reflect cafeteria or durable medical equipment operations?
"It's not necessarily translated the same way across organizations," Cleverley says.
CHIPS' two key measures of financial performance are price-level-adjusted returns on investment and financial flexibility. Returns on investment have been flat in recent years, suggesting hospitals have been over-investing in "unproductive" assets.
"New investment (in property, plant and equipment) has a very real cost, and managem