Hospitals and healthcare system executives who have used investment income to keep their financial heads above water need to look for a new life preserver.
Like countless other investors in recent years, provider organizations have grown accustomed to healthy double-digit annual rates of return on their portfolio equities. The resulting spurt in investment income came at an opportune time and helped minimize the sting of reimbursement cuts mandated by the federal Balanced Budget Act of 1997.
For many hospitals, the cushion has been enough to parlay operating losses into small bottom-line gains. Investment income also let some hospitals plow ahead with capital projects that may have been jeopardized by operating woes.
But a new Fitch report says that hospitals' overall investment return dropped to 8% last year. The New York-based ratings agency also is concerned because of the steady shift of hospital funds from conservative fixed-income investments to riskier equities.
The situation may become even more tenuous once results are logged from this year's topsy-turvy stock market. And most analysts are not bullish about the economic outlook for 2001.
Despite the uncertainty, the message should be clear to hospital and health system managers. Increased market share, cost containment and operational improvements are the cornerstones of financial success. Investment gains and philanthropy should be viewed as fiscal gravy rather than budgetary meat and potatoes.
Relief from the budget law will help, but there are other pressure points to navigate. For many, budget law givebacks from Congress will be more than offset by higher labor costs, the conversion to Medicare ambulatory payment classifications and compliance with the Health Insurance Portability and Accountability Act.
But ratings agencies, lenders and others in healthcare finance don't want to hear those sad stories; they will insist on strong leadership and tight fiscal management. Furthermore, the money crowd will cast a wary eye on those providers opting to continue down the slippery path of aggressive investment strategies.
It's gut-check time for hospitals and health systems.
Operational efficiency, clinical teamwork and a commitment to coordinated patient care must drive the entire organization. These are the life preservers that guarantee survival.