Despite downturn, hospitals found ways to boost income in 2009
Systems find ways to boost income in ’09: reports
Hospitals and health systems spent less on operations and construction in 2009 and finished the year with improved operations despite an economic downturn that has slashed state budgets and led to chronic high unemployment.
Reports released by two major credit rating agencies said operating margins increased at U.S. hospitals and health systems last fiscal year even as demand for hospital care weakened. To do so, hospitals and health systems froze salaries and benefits, laid off workers and sought raises from insurers, among other strategies to curb spending and improve reimbursement, the ratings agencies said.
Fitch Ratings reported the median operating margin rose to 2.8% in fiscal 2009 among the roughly 240 hospitals and health systems included in its yearly analysts of operating and balance sheet performance. That’s compared with 2.2% in 2008 and 2.6% the prior year. Among those rated by Standard & Poor’s, median operating margins also rebounded after a drop in 2008.
“It was a little surprising,” said Jeff Schaub, managing director for not-for-profit healthcare at Fitch. The New York rating agency’s data found hospitals saw demand from patients remained flat or declined by 1% to 1.5%, Schaub said, and hospitals reported fewer procedures such as in orthopedics. “Not a good year to get your knee replaced,” he said.
Michael Burger, an associate director with Fitch’s not-for-profit healthcare group, said efforts to control labor costs, which often account for more than half of expenses, contributed most to gains. Hospitals and health systems reduced payroll through layoffs and attrition, he said. Reduced spending on capital projects produced more moderate results, Burger said, and noted the 18% drop for one key measure of such investments, capital spending as a percentage of depreciation expense. Strategies to boost revenue were less significant, he said.
Reduced bad debt and lower interest rate costs also contributed to the operating gains, Fitch said in its report.
Balance sheets recovered last year after volatility in equity and credit markets drained cash reserves. Standard & Poor’s and Fitch reported hospitals and health systems saw cash reserves increase, as measured by the number of days savings can fund operations. Standard & Poor’s said the median days cash on hand rose to 151.6 in fiscal 2009 from 145.9 the prior year. Fitch reported an increase for the same ratio to 166.8 days from 151.6 days.
Martin Arrick, managing director for Standard & Poor’s, said in a conference call for investors last week that the sector appears more stable than a year and a half ago, when volatility stressed balance sheets. Hospitals responded to the market distress by targeting operations.
But recent operating gains may not last, Arrick said. “It’s not unusual to see volume declines combined with steady or even improving operations, because of the operating cuts that people have made,” he said. “The issue we have, and that we’re concerned about, is that’s not a sustainable picture over a long term. Expenditure cuts are fine for one, two, three years, but the revenue side will have to change in some way.”
Nick Vitale, senior vice president of financial operations for Beaumont Hospitals, said the Royal Oak, Mich.-based system has continued to successfully curb spending and boost revenue after a turnaround in fiscal 2009.
Beaumont closed its books in the end of December with operating income of $14.9 million after losing $29.5 million the prior year. The 2009 gains came after adopting repeated rounds of cost-cutting in response to the recession. The three-hospital system laid off workers, froze salaries and cut physician and executive compensation, he said. Beaumont also curbed supply costs by working with doctors on use and standardizing products. The system negotiated some inpatient rate increases from insurers and lower prices from vendors.
“We were swimming upstream the entire year,” he said. Salary freezes remain in place. Now the system is seeking further expense reductions from more standardized care, he said.