Sometimes it's hard to believe that for-profit hospitals and not-for-profit hospitals are in the same industry.
Both sectors have been subject to the same cost and revenue pressures, especially those resulting from the Balanced Budget Act of 1997.
Yet while the outlook has brightened substantially this year for investor-owned hospital companies (See story, p. 80), not-for-profit hospitals remain in the doldrums.
In a positive sign, some large not-for-profit systems are reporting stronger operating results this year (See chart). And late last month, the Standard & Poor's rating agency predicted that median operating results for not-for-profits would show improvements for 2000 and 2001 (Oct. 30, p. 2).
Operating results are a key measure of viability, since they don't include investment income. In 1999, median operating results for not-for-profits fell to their worst levels in years, ranging from a loss of 3% for noninvestment-grade hospitals to profits of 1.3% for A-rated hospitals, according to Standard & Poor's, which rates 552 hospitals.
But it's too early to declare a turnaround on the not-for-profit side. Rival rating agency Moody's Investors Service believes that more not-for-profits will show operating losses in 2000, resulting in a worsening of the median figures.
Moody's analyst Dennis Farrell acknowledges that some larger systems have improved operating performance, but he says many smaller hospitals have not. "The magnitude of the losses will be smaller (for 2000 vs. 1999)," he says.
Not-for-profits that have reported improvements say that, in many cases, they are still not at sustainable levels and won't be until there is more relief from the 1997 balanced-budget law.
St. Louis-based Ascension Health, for example, posted an operating profit of 0.6% for its first quarter ended Sept. 30, compared with a loss of 0.02% in the year-ago quarter. Ascension Chief Financial Officer Jerry Widman says the system would like to reach 3%.
"Call it partly sunny instead of partly cloudy," Widman says. "We're still not getting a suntan."
St. Louis-based SSM Health Care has been running an operating profit of about 2% this year, compared with a loss of 2% for all of fiscal 1999. Its fiscal year ends Dec. 31.
SSM Senior Vice President of Finance Liz Alhand says the improvement is a result of realigning services and exiting risk-based managed-care contracts, not the budget-act relief passed last year.
Bon Secours Health System in Marriottsville, Md., has also focused on operational improvement, resulting in a "significant" boost in figures for the fiscal year ended Aug. 31 from the previous year's 1.9% operating profit, says CFO Mike Kottrell. The system plans to release figures in December, he says.
Despite such gains, a cloud continues to hover over the not-for-profit sector, with credit-rating downgrades continuing to outpace upgrades. For example, rating agency Fitch recently reported that for the nine months ended Sept. 30 it downgraded 13 not-for-profit hospitals and upgraded none.
Meanwhile, for-profit hospital companies have been showered with positive financial news. Shares of publicly traded hospitals have climbed this year even amid a slump in the overall stock market. Analysts are expecting continued healthier earnings, sparking renewed investor enthusiasm.
Since July, Fitch removed Nashville-based HCA-The Healthcare Co. from its negative watch list and boosted its outlook for Universal Health Services, King of Prussia, Pa., to positive from stable. Standard & Poor's shifted HCA's credit rating to stable from negative, and upgraded Naples, Fla.-based Health Management Associates' outlook to positive from stable.
Improved financial performance on the investor-owned side is borne out in companies' latest earnings reports. Aside from Nashville-based Quorum Health Group--which reported depressed earnings because of a large Medicare fraud settlement--most companies reported strong earnings growth that exceeded Wall Street's expectations. Profits at Province Healthcare Co., Brentwood, Tenn., increased 78.5% to $5.4 million.
Analysts say the dichotomy between investor-owned and not-for-profit hospitals stems from their variant fiscal priorities and operating philosophies, which led to dramatically different responses to the balanced-budget law.
Investor-owned hospitals generally have weaker balance sheets and lower credit ratings. For example, Moody's gives for-profit hospitals a median rating of Ba1 compared with an A3 rating for not-for-profits. The rating agency says it considers investor-owned companies riskier because of their short-term need to grow earnings, which leads to a greater tendency to enter riskier strategic ventures.
But that short-term focus also made for-profits "quick to focus and pare down their operations" once the impact of the budget law became apparent, Moody's analyst Diana Lee says.
Not-for-profits were generally slower to sell or close unprofitable facilities, HMOs and physician practices. As a result, they have lagged behind for-profits in turning their operations around, analysts say.
The not-for-profit sector's focus on meeting community needs is its biggest strength, Moody's Farrell says, promoting long-term viability. But he says it's also a weakness if a hospital can't act quickly in the face of a crisis.
Farrell says many not-for-profits were in denial about a coming downturn and failed to act.
"In May 1997, when we first put out a negative outlook (for not-for-profit hospitals), there was a significant amount of disbelief by (not-for-profit) hospital management, saying we didn't understand the total picture," Farrell says. "Many said they could rely on investment income."
He adds, "Now, all but a few exceptions recognize the need to focus on core operations."
--With Barbara Kirchheimer