When it comes to hospitals' financial health, bigger seems to be better, although facilities of all sizes remain vulnerable.
Those are among the conclusions in a new report by longtime industry analyst William Cleverley. In the 177-page study, State of the Hospital Industry: 2001 Edition, Cleverley says small hospitals are increasingly at great financial risk and that revenue management-perhaps even more than cost management-is crucial to their survival.
Cleverley, 54, president of Columbus, Ohio-based Cleverley & Associates, finds that the U.S. acute-care hospital industry is "quickly becoming a system of have and have-not hospitals." He also cites a significant deterioration in hospital profitability over the past few years. "Although many hospitals are experiencing declining profits, there is a segment of low-performing hospitals that appears to be suffering the most," he says.
He says the division between high-performance and low-performance hospitals is defined increasingly by size. For example, more than 78% of all hospitals with less than $5 million in annual revenue fall into the category of low-performance hospitals.
Cleverley ranks hospitals based on their success in four financial measures: return on equity, economic value added, total margin and financial strength index. Hospitals with the highest blended values for those measures are grouped as "high-performance" facilities, while those with the worst grades based on the measures are tagged as "low-performance" facilities.
"A lot of the smaller hospitals appear to be at risk," he says. "A few years back, it was small rural hospitals that seemed to be dying. Now it's still small facilities, but they're more likely to be urban. The issues are market share and pricing. The Aetnas and Anthems don't need small urban hospitals in their networks. So those hospitals are simply unable to extract good prices from managed-care firms to retain their financial viability."
He says many small hospitals, with older physical plants and poor access to capital markets, are swimming in debt, failing to update technology and equipment and, in some cases, approaching default.
Cleverley says he's seeing another financial trend for hospitals of all sizes: less of a fixation with costs.
"Revenue management is at least as critical as cost management to hospital performance," he says. "That was a surprising finding, because only a few years ago, cost management was the big performance indicator. Hospitals that performed well were doing a good job of controlling costs. Now the hospitals that do well are the ones able to extract the highest prices from managed-care companies and other payers. The primary difference between high-performance hospitals and low-performance hospitals is what they're able to negotiate."
He says the report extracts information from 1999 Medicare discharge data, but acknowledges that his industry snapshot could change significantly with 2000 data, which he forecasts as a better year for hospitals.
"Quite clearly, in 1999 hospitals were not as healthy as they used to be," he says. "My initial reaction is that 2000 will be a better year on the operating side. Hospitals have improved their pricing and the effects from the Balanced Budget Act (of 1997) have modified a little."
But there are plenty of other uncertainties. Cleverley also points to dramatic erosion in hospital investment income as a potential financial obstacle. "Because of the stock market crash, there's been a steep drop in the value of hospital portfolios," he says. "And that could come back to haunt hospitals, in spite of improved operations."
Although Cleverley doesn't believe geography is a predominant financial indictor of hospital success, his research unearths some interesting regional variations in healthcare costs. "More than anything else, those variations are a function of underlying payment systems that exist in different regions," he explains, noting that in New York, for example, price controls made it difficult for hospitals to earn a profit.
Cleverley co-founded the Center for Healthcare Industry Performance Studies at Ohio State University in Columbus in 1992, 14 years after starting the Healthcare Financial Management Association's Data Plus Services.
He employed the same research techniques and data analyses to produce his 2001 report on the hospital industry. The publication focuses on acute-care hospitals and compares facilities by size, metropolitan statistical area, state and category through a number of cost and charge factors, such as supply and labor costs, age of facilities, nursing costs per adjusted patient day, average cost per Medicare discharge and Medicare length of stay. The data have been adjusted for case mix and cost-of-living differences.
Perspective is crucial when interpreting financial data, Cleverley cautions. Some indicators taken out of context, such as days' cash on hand, might trip up financial sleuths.
Although that figure is a prime indicator of financial stability, states such as Florida, Nevada and Utah appear in the report to have the lowest numbers for cash on hand. And that's misleading without knowing the likely explanations. Cleverley says those states have low cash figures because they have significant numbers of investor-owned hospitals, and most investor-owned chains have centralized cash management, which sweeps the cash drawers clean every day and exports the money to corporate headquarters out of state. In fact, Florida and Utah are among the top-five states based on total margins, according to the report.