BAD FOR BUSINESS
Despite a shortfall in patient-care revenue for the past 25 years, hospitals turned a profit thanks to investments and other revenue
An exclusive analysis reveals that hospitals have survived-if not thrived - by generating revenue from sources other than what they do for a living
Imagine sneaking a peek at the financial ledgers of your local mechanic and finding out that in the past two decades he had never in any year earned enough money fixing cars to pay the expenses of his repair shop. Yet on his balance sheet you see he’s turned a healthy profit in every single one of those years. And all around you sits a gleaming new garage with wide repair bays and flat-screen TVs in the waiting room.
Wouldn’t you wonder exactly what this guy is up to?
This is how the world of hospital finance appears to many observers. It’s a paradox that surprises not only outside observers, but also longtime hospital officials themselves. An indepth Modern Healthcare analysis of statistics published annually by the American Hospital Association finds that in the 25 years since hospital bed counts started declining, the hospital industry as a whole has never earned enough revenue from patients to cover costs.
Yet in that same time hospitals turned an overall profit each year, with net profit margins ranging from nearly 7% in the good years to almost 3% in the lean years, including the deeply recessionary 2008.
Observers within and outside hospitals say there’s only one way that the industry can function without turning a profit from its core business of patient care: non-operating revenue sources. Chiefly, that means investments.
Not-for-profit hospitals, which constitute about four in five hospitals in the AHA survey data, have quietly amassed large portfo- lios on Wall Street as the philanthropy they once depended on has given way to investments that produced unprecedented fortunes during the 2000s.
Hospital financial officers say that it’s just good business, and that this non-operating funding benefits patients by underwriting uncompensated care and unprofitable services. “Revenues from patient care do not cover the expenses of the organization, and that has been consistent,” said Caroline Steinberg, vice president for trends analysis at the AHA.
Some healthcare economists, however, say there’s a danger inherent in the disconnect between patient care and hospital finances. Skeptics say that using investment proceeds to balance budgets could hurt patients by driving up systemwide costs to unsustainable levels at a time when even ordinary healthcare costs are too expensive for the average middle-class family.
“Basically, the endowment revenue is providing an excuse, so to speak, for not engaging in the difficult cost-cutting that would otherwise be required,” said University of Florida at Gainesville professor Louis Gapenski, whose textbook, Healthcare Finance, is in its fourth edition. “I’ve always been a firm believer that the best way to ensure long-term financial sustainability is by demonstrating economic via-
Patients benefit from the financial lift hospitals get from their investment portfolios, and other sources of nonpatient revenue, hospital executives say.