Efficient, quality care can aid shrinking margins

It's no secret that hospital margins are under pressure. What is less well-known is the extent to which a growing share of hospitals are sinking into a sea of red ink—a fact uncovered by Modern Healthcare's first-ever analysis of system operating margins using our new financial database.

Only 84% of the 179 largest systems in the nation reported positive operating results in 2013. That was down sharply from the 89% that posted positive results in 2012, according to the analysis conducted by finance reporter Beth Kutscher (See story, p. 8). More than 60% of the organizations in the database saw operating margins decline last year.

There are numerous reasons behind shrinking margins. Government reimbursements for Medicare patients were hit by sequestration-imposed budget cuts. Medicaid—always the lowest payer—covers a larger share of the population. The CMS is imposing higher penalties for poor quality and outcomes. And the agency's auditors are stepping up their scrutiny.

Employers remain vigilant in pressuring providers to cut healthcare expenditures. Systems are responding by shifting more services to outpatient settings, where reimbursements are lower. Physicians are beginning to respond by eliminating unnecessary tests and procedures. Systems are spending more, too, to improve quality and safety and adopt electronic health records.

Let's not forget the rise of consumer-driven medicine. Growing transparency of costs, prices, payments, quality indicators and outcomes is giving patients more information than ever before about system performance. If they weren't paying attention before, the rapid rise of high-deductible insurance plans is sending a clear message that it's about time they start.

A closer look at the numbers in the Modern Healthcare financial database reveals another disturbing trend. System finances are being shored up by returns from financial markets. Many chief financial officers offset deteriorating operating margins last year by posting hefty gains from astute management of financial assets.

That's not a path toward sustainability. What financial markets give today can just as easily be taken away tomorrow.

The growing pressure on margins is undoubtedly the No. 1 factor driving the merger-and-acquisition boom of the past few years. Delivery system reform in anticipation of payers moving toward capitation gets more attention. But the current fiscal environment suggests mergers are more like grasping at a life raft than sailing into a safe harbor.

In the short run, mergers provide struggling smaller hospitals or systems with immediate economies of scale in purchasing. They eliminate duplicate layers of costly top management talent. And the acquiring system can provide tools and standardized processes from revenue cycle to the operating room that can raise revenue, improve outcomes and lower costs at facilities that were behind the curve in adapting to changing expectations on all those fronts.

But those one-time gains also will not achieve long-term fiscal stability.

Not-for-profit healthcare systems—and the vast majority of systems in our database are not-for-profits—are far from going broke. Most systems still maintain cash cushions and most are still operating in the black.

Yet margins cannot continue to shrink indefinitely. Given that government deficits and reimbursement pressure from employers aren't going away, the only viable long-term solution for shrinking margins is building a more efficient and effective healthcare delivery system.

Follow Merrill Goozner on Twitter: @MHgoozner