Nearly half the nation's hospitals didn't make enough money last year to maintain their operations and stay competitive, according to the American Hospital Association.
The aggregate hospital profit margin sunk to 4.7%, its lowest level since 1994, according to data from the AHA's annual statistical report, which was released last week.
The report, Hospital Statistics 2001, is considered the most reliable source of hospital financial data because it's based on a survey of all of the nation's hospitals, rather than a sample.
Significantly, 48.6% of hospitals reported profit margins of less than 3%, said Carmela Coyle, the AHA's senior vice president of policy. That compares with 42.2% reporting profits below that threshold in 1998.
Some 32.1% of hospitals lost money in 1999, compared with 26.6% that were in the red the previous year.
Hospitals with profit margins of less than 3% "don't have the financial resources they need to maintain their infrastructure and prepare for the future," Coyle said.
The figures confirm the grim financial news that's been suggested by a flush of studies and surveys by rating agencies, consulting firms and state hospital associations in recent months. Hospitals were hit hard by one of the lowest revenue increases in years in 1999, mainly because of Medicare and Medicaid cutbacks from the Balanced Budget Act of 1997 and reduced payments from private insurers.
Hospitals bore the brunt of the budget-act impact in 1998 and 1999. Simply put, revenue didn't keep pace with expenses, even as hospitals worked to trim costs.
The average expense per adjusted admission increased a modest 2% to $6,512. But revenue per adjusted admission inched up even more slowly, at a paltry rate of 0.7%.
"If I only got a 0.7% raise, I wouldn't be real happy," said Don May, the AHA's senior associate director of policy development.
So far this year, there is some evidence that the downward trend may be flattening, however, particularly for large hospital systems that have worked hard to orchestrate turnarounds.
Last week HBS International, a Bellevue, Wash.-based outcomes data firm, reported that operating results improved in the second quarter for large and mid-sized hospitals, compared with year-ago results. Smaller hospitals, however, continued to see declining performance, the firm reported.
Overall second-quarter operating profit margins were 3.5%, vs. 3.1% in the same period last year, according to HBSI. The firm's statistics are based on data from 341 hospitals that subscribe to its financial benchmarking tool.
Coyle says key to this year's financial performance is whether hospitals have continued to control costs. "If volume is up, are the revenue dollars that come with that volume sufficient to cover the costs?" she asked.
Fueled by last year's passage of a modest Medicare payment relief package, which was worth slightly more than $7 billion to hospitals over five years and took effect in late 1999, hospitals are pushing for a second round of relief that would add $12.3 billion to their coffers over five years, probably starting early next year.
However, extra money from Medicare could be partly offset by higher costs for nurses. In addition, the bottom-line impact of Medicare's new prospective payment system for outpatient care, which took effect this year, is unclear.
Any improvement in the industry's overall financial performance, however, would not erase the fact that there is a widening variation in financial performance. And weaker hospitals are having a more difficult time obtaining credit.
Investors look for operating margins of at least 2% and total margins of 5% to 6%, said Terry Mieling, director in healthcare at the Chicago office of Merrill Lynch & Co. "You need to have a strong cash flow so you can keep up with technology as well as infrastructure improvements. If you don't, the quality of care suffers and the physicians get upset and start leaving," he said.
Richard Clarke, president and CEO of the Healthcare Financial Management Association, added that a total profit of less than 3% is cause for concern because it's below the medical inflation rate. "The equity of the organization is growing at a slower rate than inflation, (which means) the purchasing power of the organization is declining," Clarke says.
According to the AHA data, hospitals were busier last year, making volume the No. 1 driver of increased revenue. Inpatient admissions increased 1.7% to 32.4 million, and total outpatient visits rose 4.4%. Notably, the average length of stay dropped slightly to 5.9 days from 6.0.
The nation's 4,956 acute-care hospitals posted total net revenue of $351.6 billion, up 3.9% from the previous year, while expenses climbed 5.1% to $335.2 billion.
Hospital Statistics 2001 is based on data from the AHA's annual survey of all U.S. hospitals. It has an average five-year response rate of approximately 83%.
The report also found that more hospitals are offering complementary medicine services. Some 552 hospitals, or 10.2%, offered treatment not based solely on traditional allopathic medical teachings, compared with 7.7% in 1998.
"The fact we're seeing more hospitals incorporating consumers' desires into the way they provide care is certainly good news for patients," Coyle said.