De­spite a short­fall in pa­tient-care rev­enue for the past 25 years, hos­pi­tals turned a profit thanks to in­vest­ments and other rev­enue

Modern Healthcare - - Front Page -

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.

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