It's a bad time to be the go-to guy for hospitals in crisis.
Statistics released last week by the American Hospital Association explain why. Collectively, U.S. community hospitals posted greater profits and margins in 2005 than a year earlier, continuing a streak of solid financial performance that has left many hospitals with more cash, better credit, stronger balance sheets -- and less need for a turnaround expert.
Demand has flagged for executives who replace an ousted hospital chief executive as interest in hiring consultants who boost profit or fine-tune operations has grown, said David Speltz, a managing director with Huron Consulting Group's healthcare practice, where consulting recruits have outpaced turnaround executive hires by a 3-to-1 ratio. "I do not think it's an accident of the marketplace," he said of the industry's improved fortunes, crediting improved operations in large part for the gains.
Ratings agency executives see it too. "As anyone can tell, things are getting better," said Marcelo Olarte, an analyst for Fitch Ratings, which scrutinizes the performance of 240 not-for-profit hospitals.
Much better, by many measures, according to the trade group's yearly snapshot of nearly 4,900 hospitals' aggregate finances and operations.
Revenue growth -- which held steady at roughly 7.3% -- outpaced expenses in 2005 to deliver a $28.9 billion profit and the highest margin, 5.3%, in seven years, the hospital association figures show.
Actual revenue totaled a record $544.7 billion last year. Expenses climbed to $515.7 billion, up 7.1%. That's a slight uptick from the 6.9% rise a year earlier. Despite that increase, efforts to curb expenses such as labor, supplies, capital-intensive technology or construction have fueled recent financial gains, credit analysts said. That success, combined with favorable, or "benign," reimbursement from private and public insurers, including Medicare, buoyed budgets, they said.
Overall, hospitals admitted roughly 35.2 million people, about the same number of patients admitted a year earlier. Patients' average hospital stay held steady at a little more than 51/2 days and emergency room traffic picked up slightly, about 2%. Inpatient and outpatient revenue both grew, at 9.6% and 14%, respectively.
The AHA figures are the latest indicator of the industry's strong, steady financial growth in recent years. In August, Fitch Ratings noted that its not-for-profit hospitals' 2005 operations "exceeded expectations" as the median operating margin jumped to 2.8% from 2.1%. Moody's Investors Service reported its tax-exempt hospital portfolio saw profits and liquidity hit highs not seen since 2001 (Aug. 7, p. 12). Meanwhile, Moody's and Standard & Poor's upgraded ratings for more hospitals than analysts downgraded in 2005.
The rise in profits comes amid a continuing construction boom in the industry. Modern Healthcare's most recent construction survey found overall spending on projects that broke ground rose nearly 12% to $29.2 billion in 2005 compared with $26.1 billion a year earlier (March 13, p. 30).
AHA officials said that data showed evidence of slower expense growth. Indeed, the hospital association's 2005 figures reflect slower expense growth, said Caroline Steinberg, the AHA's vice president for trends analysis. The cost per hospital patient rose 4.5% last year compared with a 6% increase in 2003, she said.
Despite that, Steinberg argued the industry remained vulnerable thanks to high-capital technology demands, a chronic labor shortage and insufficient payment from Medicaid and hospitals' largest insurer, Medicare. "In general, the financial health of hospitals is fragile," she said.
Separately, the Chicago-based trade group released its estimate of hospitals' losses from Medicaid, Medicare and uncompensated care, all of which increased from 2004 (See related story below). "It's a significant challenge," she said. Steinberg noted that last year's margin of 5.3% falls short of the 6.7% margin hospitals enjoyed before Congress passed the 1997 Balanced Budget Act, which pushed through a five-year plan to curb federal healthcare spending.
Healthcare insiders and analysts agreed hospitals could see budgets tighten if Congress squeezes Medicare spending.
Such changes appear unlikely in the near term. The CMS eased proposed cuts that would have significantly curbed reimbursement for certain cardiac surgery procedures and improved outpatient payments for fiscal 2007, which began Oct. 1, Moody's said. And healthcare reform is unlikely before the 2008 presidential election with an ongoing war, said Moody's analyst Lisa Goldstein, but she added that not-for-profits face continuing congressional scrutiny of executive compensation, charity care and pricing policies.
Trinity Health's recent gains mirror national trends. The Novi, Mich.-based Roman Catholic system, which owns or operates 43 hospitals in nine states, boosted its 2006 operating profits by 84%, Moody's said, in part by checking expense growth at 4.7% while revenue increased 6.3%. That raised Trinity's operating margin for the second year to 3.4% in fiscal 2006, which ended June 30, from 1.6% in 2004.
Ed Chadwick, Trinity's chief financial officer, said a continued focus on rising productivity and tracking staffing levels helped manage Trinity's labor costs, which slowed in 2006, rising roughly 4% to $2.97 billion, according to financial statements. That's compared with a 4.9% increase in 2005. Technology and health information investments improved the system's productivity, he said. Use of electronic medical records in nine Trinity hospitals increased the time that nurses spend with patients by 7%.
But by one measure, Trinity saw revenue growth slow. The system's 22% increase in charity care -- free or discounted care -- eroded gains for Trinity's net revenue per patient, which grew 3% in 2006, down from 5% a year earlier, he said.
It's a trend that's likely to continue as demand for charity care climbs and Medicare or private insurers squeeze future payments, Chadwick said, making it essential Trinity use its size and clout to improve efficiency. "We view it as being critically important," he said.