Fresh financial data from a private consulting firm bolster the widespread belief that 2000 was another tough year for not-for-profit hospitals.
Although overall operating profitability rose slightly, to 3.7% from 3.3% in 1999, that wasn't enough of an improvement to signal the beginning of a recovery, says Gregg Bennett, president of Solucient, an Evanston, Ill.-based healthcare information company.
"I suspect that hospital operating margins are not on an upward swing," Bennett says. "Cost increases (particularly for labor and drugs) and the reluctance of purchasers to pay more than they are now are ominous for the hospital industry."
Analysts say most hospitals need operating margins of at least 5% to invest in new technology and capital projects. Lower margins could eventually force a hospital to merge or close, unless the facility has substantial reserves.
Solucient's report on the financial health of not-for-profit hospitals, scheduled to be released this week, is based on data from the firm's approximately 750 hospital and healthcare system clients nationwide. The data previously were collected by HBS International, which merged with HCIA-Sachs last December to form Solucient. The firm says its client base is representative of not-for-profit hospitals nationwide.
Bennett concurs with other industry analysts who believe hospital margins will be slow to recover after suffering hits from Medicare cuts, unprofitable physician practices and managed-care cost pressures.
"Premiums are going up again, which will put a lot of pressure on payers to further restrict payments to hospitals," Bennett says. He's "very afraid" of the industry's labor shortage, because personnel accounts for 60% to 65% of hospital costs, he says.
The numbers show dramatic trends related to location and size. In 1997, large hospitals, those with 300 or more beds, were the most profitable, with margins of more than 6%. But those margins have plummeted to 2.8%. Meanwhile, small hospitals, with fewer than 150 beds, have seen a much smaller decline in profitability, to 4.8% from 5.6%, according to the data. Medium-sized hospitals have seen their profitability fall to 3.4% from 5.9%.
In 1997, the West was the second-most profitable of five regions, with profits averaging 6%. Last year the West ranked least profitable, with average margins of 3.9%.
Meanwhile, hospitals in the Northeast showed a dramatic improvement from an average operating margin of zero in 1999 to 4.9% last year. Solucient spokeswoman Kerry Lyndon-Minton says significant improvements by some large hospitals account for the turnaround.
Hospital associations in two Northeastern states, however, were quick to deny any upturn in the financial performance of their members, citing climbing costs that had offset any operational improvements. A survey released in March by the Massachusetts Hospital Association showed that operating margins for that state's hospitals declined for the fiscal year ended Sept. 30, 2000, to -3.3% from -2.5% in 1999.
The Healthcare Association of New York State plans to release its own profitability survey in a few weeks. "Most of the hospitals we've heard from expect last year to be as bad or even worse (than 1999)," says spokeswoman Monica Mahaffey.