If the hospital business is truly a story of haves and have-nots, then count multihospital systems among the haves, especially when it comes to hospital operations.
Those hospital operations were healthier in fiscal 2004 than in the previous fiscal year, according to Modern Healthcare's 29th annual Hospital Systems Survey.
The operations strength reported by the systems that responded to the survey has been reflected in some previous indicators the past few months. The three main bond-ratings agencies -- Fitch Ratings, Moody's Investors Service and Standard & Poor's -- all reported that credit upgrades exceeded credit downgrades in the first quarter of 2005 (April 18, p. 14). The magazine's 26th annual Construction & Design Survey (March 7, p. 30) indicated that $22.6 billion in healthcare construction projects were completed in 2004, up more than 25% from 2003. And hospital dealmaking also strongly rebounded last year after two slow years (Jan. 24, p. 20).
For the 136 hospital systems that provided full financial data for both fiscal 2003 and 2004, aggregate operating margin -- defined as net operating income divided by net patient revenue -- increased to 4.18%, from 3.81% in 2003.
Net margin, which is net income divided by net revenue and includes nonpatient services, fell to 4.68% in fiscal 2004 from 5.52% in 2003. By comparison, figures reported by the American Hospital Association for nearly 5,000 hospitals for fiscal 2003 showed a net margin of 4.8%, the highest level since 1998 (Nov. 1, 2004, p. 8).
Twenty-four systems reported higher net operating income than net income for fiscal 2004, with overall losses on nonpatient services of $1.5 billion. In fiscal 2003, however, 44 systems, nearly twice as many systems compared with fiscal 2004, reported higher net operating income than net income, with combined nonpatient losses of $2.08 billion. The reason the aggregate net margin -- the true bottom line -- fell from fiscal 2003 to fiscal 2004 is that hospitals that did earn income on non-operating services earned much less on nonhospital services overall for 2004 than in the previous year.
In fiscal 2004, the 112 systems that made money on nonhospital services earned a combined $3.65 billion over their hospital operating income. In fiscal 2003, 92 systems posted profits on nonhospital services, but they earned a combined $6.74 billion.
Generally, investment income is the bulk of nonpatient revenue and earnings for not-for-profit systems, says John Wells, senior director of public finance healthcare for Fitch. Asset sales, earnings from joint ventures, philanthropy and extinguishment of debt also can have an effect on nonpatient revenue and earnings, Wells says. Anecdotally, not-for-profit systems indicated that 2003 was a better year for their investments than 2004, he says, but Fitch has only collected data on investment trends through 2003.
The systems survey is not a scientific sampling of hospitals. To qualify for the survey, organizations must own, lease or sponsor two or more acute-care or psychiatric hospitals.
A total of 139 systems responded to the survey by providing at least partial figures, down significantly from the 182 systems that responded to last year's survey and 198 systems that responded in 2003. The 139 respondents include 71 secular not-for-profits, 25 Roman Catholic systems, 17 systems with other religious affiliations, 16 government-owned systems and 10 for-profit companies. The most notable system to drop out of the survey this year is Tenet Healthcare Corp., which was the third-largest system by net patient revenue and by number of acute-care hospitals in the 2004 survey (June 7, 2004, p. S1). Tenet said it was unable to complete the survey by deadline.
Nancy Weaver, who analyzes for-profit hospital companies for the investment bank Stephens, says, "I think everybody felt like the hospitals had a pretty good year in 2004, so I think some stability in margins in 2004 is no surprise." There seems to be good news in the not-for-profit sector, too, Weaver says, as the for-profit companies are telling her that there are fewer not-for-profit hospitals up for sale this year compared with last year.
A year ago, Weaver was concerned about increasing bad-debt expense and the negative effects that it was having on profit margins. Among the for-profit companies that Weaver follows, bad-debt expense levels as a percentage of net revenue began to stabilize in the last half of 2004, and they were below her expectations in the first quarter of 2005, Weaver says.
"We continue to see signs that the economy is a little bit stronger, so it seems like things are definitely stable, and we have to see how the year plays out," she says. With "the number of uninsured (patients) coming into the ER and other statistics behind the bad-debt numbers, you see some improvements."
Insured patients with copayments and deductibles also can be sources of bad debt for hospitals. Weaver says employers have slowed the shift of healthcare costs onto employees because the employers need to have competitive benefit plans in a tightening labor market. "The big employers are saying that they can't push that (cost-shifting) lever much more. High-deductible plans and other things are being used instead of cost-shifting," she says. "That should hopefully turn into OK (patient) volumes for hospital systems."
Caroline Steinberg, vice president for trends analysis at the American Hospital Association, says hospitals' finances remained flat in 2004 as expenses continued to rise. "It's going to continue to be tough," she says. Safety and technology improvements, workforce shortages, an aging population and rising numbers of uninsured patients will squeeze hospital finances, even as patients' demands grow. "There's a lot we want from our health system," she says. "It's really a time for investment, not cutbacks."
Bad debt not as bad
Weaver and Lisa Goldstein, a senior vice president and the leader of the healthcare ratings group at Moody's, both say that hospitals' efforts to combat bad debt seem to be paying off. Their front-line staff are doing a better job of collecting copayment and deductibles and of enrolling eligible patients in government programs or steering them to the hospital's charity-care process. Among not-for-profits, Goldstein says, better upfront collections are a part of the emphasis on revenue cycle management over the past few years.
Goldstein adds that the bad-debt problem is driven by the local market. With its not-for-profit ratings portfolio, Goldstein says, Moody's looks at the sum of bad debt and charity care to find trends. A decrease in bad debt that is offset by an equal increase in charity care leaves a hospital with the same operating income, she says.
After some volume weakness in 2004, Weaver says she sees some positive indicators for volumes beyond the increase in employment. Volumes that for-profit hospital companies reported in the first quarter were solid, although there is some debate in the industry over whether those rosier figures were dependent on flu admissions, a seasonal factor that doesn't imply any volume recovery generally, she says.
Nurse-staffing companies are reporting strong demand for their nurses, and that's usually a good indicator that volumes are building, Weaver says. At some point, greater use of temporary nurses puts pressure on costs, but for now, Weaver says, "I think the hospitals would be happy to pay that if they had the volume increase. The weak volume has been a problem for the industry for the last couple of years."
Climbing the charts
New York-Presbyterian Healthcare System nudged past Ascension Health to the top of the not-for-profit rankings for most staffed beds-but just barely. The 35-hospital New York-based system reported 24 more staffed acute-care beds than 63-hospital Ascension, based in St. Louis.
Ascension continues to report higher revenue figures, despite New York-Presbyterian's strong growth in net patient revenue and net revenue from 2003 to 2004. The Catholic health system reported $9.5 billion in patient revenue and $10 billion in total revenue. New York-Presbyterian saw its patient revenue increase 31% to $8.3 billion and its total revenue increase 32% to $8.9 billion.
New York-Presbyterian's financial surge is largely attributable to its affiliation agreement last year with the four-hospital Methodist Hospital System, says David Alge, New York-Presbyterian's vice president of operations. Houston-based Methodist operates four Texas hospitals -- Methodist Hospital, Houston; Methodist Sugar Land (Texas) Hospital; Methodist Willowbrook Hospital, Houston; and San Jacinto Methodist Hospital, Baytown -- and reported $1.2 billion in operating revenue in 2003, Alge says. The deal was "far and away" the largest of three New York-Presbyterian struck last year, Alge says. The hospital system also affiliated with Phelps Memorial Hospital Center, Sleepy Hollow, N.Y., and Southampton (N.Y.) Hospital.
New York-Presbyterian's largest gain came in operating income, which surged to $188.8 million in 2004 from $4.1 million in 2003. "You can thank the Methodist Hospital System for that," Alge says.
The New York health system led the not-for-profit top 10 for net income, with $692.7 million, followed by Catholic Health Initiatives, $538.5 million, and Ascension, with $469.7 million. The three reported operating margins of 2.3%, 4.8% and 2.2%, respectively.
The 10 largest not-for-profit health systems, by number of staffed beds, reported a 2.9% operating margin, slightly lower than the 3.1% overall operating margin reported by the survey's 114 Catholic, non-Catholic religious and secular not-for-profit hospitals. The 17 non-Catholic hospital systems that responded to the systems survey reported the highest operating margins among not-for-profits, 4%, compared with 3% for 71 secular not-for-profit systems surveyed and 2.8% among the 25 Catholic hospital-system respondents.
Michael Rodgers, the Catholic Health Association's interim president and chief executive officer, says rising rates of uninsured patients and possible cuts to Medicaid reimbursement represent hospitals' greatest financial challenges in the years ahead.
Rodgers says members of the St. Louis-based trade group anecdotally report rising rates of uninsured patients seeking care from Catholic hospitals, though the CHA has not formally surveyed its members on the issue. According to the AHA, U.S. hospitals spent $24.9 billion in 2003 to care for patients who can't or won't pay their bills. That's an 11% increase from 2002 (Dec. 6, 2004, p. 12). Figures for 2004 aren't yet available.
Concern that Catholic and other not-for-profit hospitals fail to provide adequate charity care to uninsured and underinsured patients has prompted lawsuits and scrutiny of their tax-exempt status, including a May 26 hearing before the House Ways and Means Committee (May 30, p. 8). Rodgers says he believes witnesses testifying before the committee were able to spotlight the differences between the missions of for-profit hospitals and their charitable counterparts.
Government Accountability Office testimony submitted at the May 26 hearing found public hospitals spent the largest share of patient operating expenses on uncompensated care, which includes both charity care and bad debt, according to their analysis of 2003 data from five states. In Texas, for example, public hospitals spent 18% of patient operating expenses on uncompensated care, compared with 6.7% by not-for-profits and 4.8% by for-profit hospitals.
Overall, not-for-profits in four of the five states ranked second for uncompensated-care spending, followed by for-profits, though the GAO noted that uncompensated-care spending varied widely among not-for-profits.
State and federal efforts to overhaul Medicaid could result in even greater numbers of uninsured patients, Rodgers says. Under the budget resolution for fiscal 2006, which begins Oct. 1, federal lawmakers will look to cut $10 billion over four years from Medicaid, which is jointly financed by the states and the federal government; the cuts would begin in 2007. HHS Secretary Mike Leavitt has championed overhauling Medicaid to end accounting measures the Bush administration says wrongly boost federal payments to states, which already are grappling with rising costs in the program.
"We're strongly committed to ways that the Medicaid program can be modernized," Rodgers says, but not by damaging the safety net for low-income patients and further straining hospitals' finances. "Community hospitals, in the long run, face formidable challenges," he says.
For the complete ranking of systems and additional charts, see the Surveys/Lists/Data section of modernhealthcare.com.