Hospital operating margins improved last year but still fell short of what they were before the Balanced Budget Act of 1997 choked off substantial Medicare revenue, according to data expected to be released this week by a data and consulting firm.
Operating margins jumped 50% from 2000 to 2001, to a national average of 4.27%, according to Evanston, Ill.-based Solucient (See chart this page).
In the past two years, hospitals have enhanced operating margins by eliminating unprofitable businesses and coaxing higher reimbursements from commercial and government payers. Higher occupancy rates and better financial management also strengthened bottom lines, said Solucient Senior Vice President Victor Breed.
But in a report, the firm said that margins hovering at about 4% "still suggest potential long-term risk for many facilities."
"I think we're still a long way from being able to say we've got a healthy system," Breed said. "I think at a minimum you'd want to see something in the 7% to 10% range."
Solucient's figures, which will be unveiled this week at the Healthcare Financial Management Association's Annual National Institute in Seattle, are among the earliest indicators of aggregate hospital performance in 2001. Its data are from about 800 hospitals nationwide that are clients of Solucient's benchmarking product.
Significantly, the figures show widening regional disparities, with South Central states including Louisiana having by far the lowest margins, averaging just 0.09% (See chart p. 11).
A 1998 study by Solucient concluded that reimbursement rates do not reflect the sicker patients in some areas. The firm said its latest data suggest that the "under-reimbursement phenomenon" may be taking a toll on hospitals in the South, although more analysis is needed.
Patsy Jeter, vice president of health economics at the Louisiana Hospital Association, said many of the state's hospitals remain in the red, serving a population that's disproportionately poor and unhealthy. "Hospitals are doing a better job of controlling costs, but they have cut just about everything they can," Jeter said.
Margin improvement varied according to hospital size. Midsize hospitals of 150 to 300 beds showed the biggest margin improvement, to 4.84% from 2.86% in 2000. Smaller hospitals averaged 4.07%, up from 2.73%, while hospitals of more than 300 beds had margins of 3.71%, up from 2.92%.
Before the budget law, large hospitals reported the highest margins of any size group. In addition to Medicare funding changes, large hospitals have been hit disproportionately with technology costs and scrutiny of their charges by managed-care payers, Breed said.
Martin Arrick, an analyst at credit-rating agency Standard & Poor's, said operating margins appear to be continuing their improvement this year, although total margins have not kept pace because investment income has dropped. Standard & Poor's has a stable outlook on the not-for-profit hospital sector.
Arrick attributed the margin improvement to one overriding factor: higher managed-care revenue. "Hospitals are doing a better job of negotiating and managing their managed-care contracts," he said.