Hospital profits inched upward for the first time in six years, but the nation's acute-care facilities had to work harder than usual for every last penny.
The aggregate hospital profit margin increased to 4.4% in 2002, compared with 4.2% in 2001, and the number of admissions and emergency room visits continued to climb, according to figures released last week by the American Hospital Association. It marked the first time since 1996 that the profit margin increased from the previous year.
The AHA's annual statistical report, Hospital Statistics 2004, is based on data from the AHA's annual survey of all U.S. hospitals and is considered one of the most reliable sources of hospital financial data because it does not rely on just a sampling of hospitals.
The average response rate during the past five years has been approximately 83%.
The battle continues
Though the news of increasing hospital margins comes just weeks after Congress passed a sweeping Medicare reform package that heavily favors hospitals, the AHA contends that its members are battling a challenging financial environment. In 2002, 29.3% of hospitals lost money, the AHA said.
"It is positive, but there is still a lot of pressure hospitals are facing," said Don May, vice president of policy for the AHA. "Hospitals are trying to make it year by year. A lot of costs are beyond the hospitals' controls.
"Hopefully we will see improvement in Medicare payment performance," he said. "We need payments to increase faster than actual costs."
Aggregate revenue for hospitals grew 8.7% to $435.9 billion in 2002, from $400.7 billion in 2001. Expenses grew 8.6% to $416.6 billion, compared with $383.7 billion in 2001.
Some go up, some down
The number of hospitals in the U.S. decreased slightly to 5,794 from 5,801 in 2001. Hospital beds also dropped, to 820,653 from 825,966 the previous year.
Margins improved because hospitals experienced high patient volumes in 2002 and held tough negotiations with health plans, which resulted in increased reimbursements, said Liz Sweeney, a director at Standard & Poor's, which rates 600 healthcare organizations.
"Revenue improvement overpowered the increase in expenses," Sweeney said. "You saw the margins go up a little bit."
Hospitals also improved margins by eliminating noncore assets, such as physician practices and clinical programs, including obstetrics and community services, she said. Increases in private insurance premiums also provided a boost.
Expenses increased as a result of higher drug and technology costs. Also making an impact on expenses were higher labor costs, as hospitals attempted to solve workforce shortages, May said. High patient volume and the growing number of uninsured also drove up expenses, he said. The AHA last month called on HHS Secretary Tommy Thompson to create less stringent federal regulations so hospitals can better respond to the needs of the uninsured (Dec. 22/29, 2003, p. 8).
"The ER becomes the place to get care," May said. "It should be the place of last resort. It is something we will continue to see."
Hospitals again saw an increase in patient volumes, leading to higher revenue. Inpatient admissions rose 2% to 34.5 million, compared with 33.8 million in 2001. Emergency outpatient visits also climbed steadily, increasing 4% to 110 million. The average length of stay remained unchanged at 5.7 days.
Hospitals will be forced to increase capacity and expand services to meet the demands, May said. Hospitals also will have to consider investing in new technology, he said.
"The capacity needed is increasing and that changes the dynamics," May said. "One of the challenges is finding the capital investment."
At Catholic Health Initiatives, which operates 68 hospitals in 19 states, operating margins have increased as the Denver-based system has reported growth in admissions and strong cost controls, said Linda MacDonald, vice president of treasury services.
In fiscal 2003, ended June 30, the system reported a profit margin of 4.2% on $6 billion of revenue, up from 3.7% in 2002, she said. The margin increase comes after several years of declines after passage of the Balanced Budget Act of 1997, which cut Medicare reimbursements, she said.
"The cut in reimbursement was quick and severe," MacDonald said. "It took several years to assimilate the changes in reimbursement."
Even with the generous reimbursement increases included in the Medicare reform package recently signed into law, it appears unlikely that hospitals will see margins return to the levels of the mid-1990s, Sweeney said. "The margins are still half of what they used to be," she said. "There is less cushion."
Catholic Health Initiatives' hospitals saw strong admissions in 2003, while bad debt increased by approximately 25%, MacDonald said.
She attributed the bad debt to an in-crease in the number of uninsured patients and higher copayments for patients who do have insurance.
"It certainly affects our bottom line in a negative way," she said. "We try to tighten our belts and cut costs elsewhere."
The new Medicare reform package should help in the future, MacDonald said. It includes roughly $26 billion in increased payments over a 10-year period. Medicare paid 97.9% of costs in 2002, down from 98.4% in 2001, according to the AHA survey.
Sweeney said she anticipates continued revenue growth in 2004, but less in years after that, as insurers' premium increases peak. "Once insurers see their revenues crimped, they will be less likely to pass along large reimbursement increases to providers," she said. "We see some risk."