The number of acute-care hospitals owned by the 210 systems participating in the survey rose 2%, to 2,123, while the number of beds in those systems rose 1% to 401,879.
“There is an increased receptivity on the part of potential hospitals to be acquired,” says James LeBuhn, a senior director and head of the U.S. public finance healthcare group at Fitch Ratings. “As individual hospitals look at the greater challenges from health reform coming down, there is a greater willingness to join larger systems and receive those economies of scale.”
A total of 199 systems are ranked in the survey financial analysis because some did not provide all necessary financials or did not meet all criteria on number of facilities as specified upon data collection. The Veterans Affairs Department was removed from all financial analysis.
Overall, the 199 analyzed systems reported earning an average of $1.98 billion in net patient revenue and $2.2 billion in total net revenue, and posting an average $122 million in net income.
That meant the systems spent an average of $2.08 billion in 2010, or about $92 million more than they earned from patient care.
That patient-revenue shortfall was in line with the long-running trend reported last year in Modern Healthcare that hospitals as an industry do not draw enough revenue from treating patients to pay all of their expenses (Aug. 2, 2010, p. 6). However, the 2010 shortfall was less than the previous year, when hospitals spent on average $140 million more than they took in from patient care.
Average total net revenue rose 5.9%, to $2.3 billion per system. On average, 91% of not-for-profit hospitals' net revenue came from patient care. In contrast, 96% of investor-owned systems' revenue came from patient care, according to the survey data.
Not-for-profit hospitals in the survey, on average, saw their net incomes in 2010 rise 133% over the prior year, to $113 million from $48 million, with most of it coming from core operations like patient care. About $70 million of the average $113 million rise in average net income at not-for-profits came from core operations.
At the same time, not-for-profits tried to suppress expenses, posting an average growth in spending of 2.7% on the year, the figures show. Experts say the industry has benefitted greatly from low overall cost inflation for supplies and labor.
The result was that not-for-profits' average net profit margins rose to 5.2% for the year, compared with 2.5% seen the year before. However, net operating margins rose to 3.4% from 2.9% the year before.
Lehigh Valley Health Network in Allentown, Pa., illustrated many of those trends.
The system, which has 893 beds between two hospitals in east-central Pennsylvania, posted a 252% increase in its net operating income, to $40.1 million in net revenue of $1.4 billion. That made for an operating margin of 2.9%.
Those results followed a 2009 in which Lehigh Valley posted $11 million in net income on net revenue of $1.3 billion, for an operating margin of 1%.
Joseph Felkner, chief financial officer for the system, says Lehigh Valley “retrenched” in late 2008 and put a focus on its fundamentals—a strategy that paid off.
“It was kind of back to basics, and the core fundamentals of the operations,” he says. “Maximizing revenue, the revenue cycle … and an extreme focus on expense management.”
Indeed, calculations based on the survey data show that Lehigh Valley's expenses increased only 0.2% between 2009 and 2010. Felkner says one of the key expense-control measures was an across-the-board wage freeze, which was eventually lifted, after which employees' salaries were restored to what they would have been under the traditional annual raise system.
But the system did not have to reduce the workforce to achieve its payroll goals. “I think it was just the commitment of the board and the management team to avoid layoffs,” Felkner says. “They stuck to that philosophy and were able to overcome the challenges that the system faced and get to the other side of the hill, if you will.”
One thing the system did not do, Felkner says, was panic when the bottom dropped out of its investment portfolio.
Lehigh Valley allocates 60% of its investments in equities—a decision that blew a hole in the system's net income figures during the recession. Including investment revenue, the system's net profit margin in 2009 was written in red ink: a negative 3.1%.
As the stock markets rallied during fiscal 2010, the system's net margin jumped back to 4.6%. Today, the investments have recovered “all of our losses, plus some, at this point,” he says. However, unlike many health systems, Lehigh Valley is in a position of not having to rely on investment income to subsidize patient care: “We do not count on investment income to sustain the operations of the health system. Our philosophy is the health system has to stand on its own on operations.”