De­spite down­turn, hos­pi­tals found ways to boost in­come in 2009

Sys­tems find ways to boost in­come in ’09: re­ports

Modern Healthcare - - News - Melanie Evans

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.

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