There are a wide variety of incremental pressures that are facing the healthcare sector, says Martin Arrick, a Standard & Poors managing director. Arrick called profits among not-for-profit hospitals and health systems a little strained, but noted that overall operations remained stable in 2006.
Net operating income rose 6.8% to $12.5 billion from $11.7 billion a year earlier, among systems surveyed by Modern Healthcare.
Net revenue and income, which include investments, spiked 23.5% and 33.6%, respectively. For 2006, systems surveyed reported aggregate net revenue of $343.6 billion and combined net income of $17.9 billion. Systems 2006 net margins rose to 5.2% from 4.8% a year earlier.
Healthy net income gains provide systems with a cushion to offset struggling operations, but poor investment performance can quickly wipe out those reserves, analysts caution. Operating income and margins better reflect systems financial health. Nonoperating income is a little like a fair-weather friend, Arrick says. All you can do is try to manage it.
Modern Healthcares survey compiled 2006 and 2005 operating data from systems that represent a total of 2,193 hospitals. Organizations must own, lease or sponsor two or more acute-care or psychiatric hospitals to be eligible to participate. The 2006 survey includes: 105 secular not-for-profits; 31 Roman Catholic systems; 17 religious, non-Catholic systems; 15 public systems; 11 for-profit companies; and one system that had a joint Catholic/other-religious affiliation.
Prominent systems that declined to participate in this years survey or didnt respond by deadline include: Adventist HealthCare, Rockville, Md.; Alegent Health, Omaha, Neb.; Allina Hospitals & Clinics, Minneapolis; Ardent Health Services, Nashville; LifePoint Hospitals, Brentwood, Tenn.; Lifespan, Providence, R.I.; and ProMedica Health System, Toledo, Ohio.
Industry giant Ascension Health, St. Louis, the largest U.S. tax-exempt private system by revenue, reported a modest gain in operating margin to 4.6% in 2006, up from 4% in 2005. (Operating margin is net operating income divided by net patient revenue.) The largest U.S. for-profit hospital operator by revenue, Nashville-based HCA, saw its operating margin slip to 4.9% last year from 5.4% a year earlier. The public sectors largest system, the VA, posted a 2.5% operating margin in 2006, a significant drop from 5.3% in 2005.
This years survey included responses from 180 systems, up from 164 last year. Of those surveyed, 178 operated acute-care hospitals. Some 81%, or 146 systems, reported home-care operations and roughly three-quarters of survey respondents, or 138 systems, operated skilled-nursing facilities. Forty-seven systems reported operating long-term acute-care hospitals. Home-care and skilled-nursing operations were also among the most reported operations in last years survey. Of the 164 respondents in the survey published in 2006 with 2005 results, 133 had home-care facilities and 101 operated skilled-nursing facilities.
Diagnostic imaging and physical therapy/ sports medicine tied as the most commonly reported outpatient services among respondents in this years survey, each reported by 125 systems. Those services ranked No. 1 and No. 2, respectively, in last years survey.
Overall, analysts say hospital operators continue to enjoy relatively strong finances. Community hospitals aggregate profits hit an all-time high in 2005, totaling $28.9 billion, according to the latest American Hospital Association figures, while net patient revenue rose 7.5% to $505 billion in 2005 vs. $470 billion in the prior year. The aggregate margin reached a seven-year high at 5.3%. The figures include data from 4,936 nonfederal, short-term, general and specialty hospitals.
In a February note on its not-for-profit credits, S&P said 2006 marked the fourth consecutive year of strong financial and operating performance among not-for-profits in its portfolio. The New York-based ratings agency noted performance may have hit a plateau in 2006, which will continue this year, and possibly 2008. Thats after a strong 2005 in which large systems fared far better than smaller hospitals. Of the ratings agencys 34 downgrades that year, 28 dropped to BBB or lower; most of the downgrades were small hospitals (Feb. 13, 2006, p. 20).
Rumblings of congressional moves to curb Medicare spending likely wont result in changes until after the upcoming presidential election, the ratings agency said in its February note, and the industrys focus on cost controls and the revenue cycle continues to yield results. For the second consecutive year, S&P raised more ratings than it lowered for not-for-profit hospitals and health systems.