Cost-cut­ting keeps prof­its high

Hos­pi­tals pro­vided free ser­vices, made money in ’09

Modern Healthcare - - The Week In Healthcare - Joe Carl­son

Hos­pi­tals gave out more free care than ever in 2009, but the lat­est statis­tics show the in­dus­try still posted record op­er­at­ing prof­its. Ob­servers said the fi­nan­cial per­for­mance amid the re­ces­sion­ary af­ter­math was so strong it may ac­tu­ally be­come a po­lit­i­cal li­a­bil­ity in Washington, where in­dus­try lob­by­ists and crit­ics will con­tinue to tus­sle over fed­eral re­im­burse­ment for­mu­las.

“If the in­dus­try shows healthy growth and mar­gins, it will be dif­fi­cult to con­vince the fed­eral govern­ment to pro­vide the in­creases we’ve been able to re­ceive in the past,” said Sid­ney Sczygel­ski, se­nior vice pres­i­dent of fi­nance and chief fi­nan­cial of­fi­cer at four-hos­pi­tal Aspirus, Wausau, Wis. “If we’re trans­par­ent as an in­dus­try about what is go­ing on, hope­fully the right story will be told and the right de­ci­sions made.”

Ac­cord­ing to the lat­est in­dus­try­wide fig­ures, re­leased last week by the Amer­i­can Hos­pi­tal As­so­ci­a­tion, the 5,008 com­mu­nity hos­pi­tals in the 2011 AHA Hos­pi­tal Statis­tics guide record- ed solid fi­nan­cial per­for­mance in fis­cal 2009.

Hos­pi­tals re­ported $34 bil­lion in to­tal profit on $690.5 bil­lion in net rev­enue, for a to­tal mar­gin of 5%. That com­pares with to­tal profit of $17 bil­lion on net rev­enue of $643.6 bil­lion in 2008, for a to­tal mar­gin of 2.6%.

Net rev­enues grew at a faster-than-typ­i­cal 7.3%, while ex­penses grew much more slowly, at 4.7%. Over the past 25 years, ex­penses and rev­enues have grown at ex­actly the same av­er­age rate: 6.9% an­nu­ally.

Hos­pi­tal fi­nan­cial ex­perts say the key fig­ures they fo­cus on are not net rev­enue, but rather op­er­at­ing rev­enue, which in­clude only pa­tient care and long-held an­cil­lary busi­nesses like gift shops, park­ing lots and cafe­te­rias.

In 2009, prof­its from op­er­a­tions broke the record since the AHA be­gan keep­ing op­er­at­ing rev­enue statis­tics in 1992. Hos­pi­tals recorded $30 bil­lion in prof­its last year on $686 bil­lion in op­er­at­ing rev­enue, for an op­er­at­ing mar­gin of 4.4%. That was up from the 3.3% op­er­at­ing mar­gin the year be­fore.

Larry Fitzger­ald, as­so­ci­ate vice pres­i­dent for busi­ness devel­op­ment and fi­nance at the Uni­ver­sity of Vir­ginia Heath Sys­tem, Char­lottesville, said hos­pi­tal ad­min­is­tra­tors across the coun­try scram­bled to find ways to cut ex­penses while keep­ing core op­er­a­tions sta­ble.

“I think what we saw,” Fitzger­ald said, “is an in­dus­try that was ex­pe­ri­enc­ing a ma­jor de­cline in in­pa­tient vol­ume and an opin­ion on the part of hos­pi­tal ex­perts that that vol­ume was not go­ing to re­cov­ery rapidly. So you saw hos­pi­tal op­er­a­tors re­spond, and the only way they could was a re­duc­tion in hos­pi­tal ex­penses.”

Mainly, those cuts came in two ar­eas: sup­plies and la­bor. With sup­plies, ex­perts said many hos­pi­tals cut back on the vari­abil­ity of their sup­ply chains while stan­dard­iz­ing pur­chas­ing across de­part­ments or even en­tire health sys­tems.

But vir­tu­ally ev­ery hos­pi­tal’s largest ex­pense is la­bor. In 2009, pay­roll and ben­e­fits con­sti­tuted 52% of all hos­pi­tal ex­penses, or $338 bil­lion of the $656 bil­lion in ex­penses, the AHA statis­tics say.

Many hos­pi­tals froze all hir­ing and did not give wage in­creases in 2009, in­sid­ers said. In many cases, those that did not con­duct out­right lay­offs in­sti­tuted at­tri­tion pro­grams or reengi­neered jobs to make work­flows more ef­fi­cient.

How­ever, ex­perts dif­fered on whether the 2009 cuts in ex­penses—and, there­fore, op­er­a­tions gains—will re­main in­tact in com­ing years.

Jim LeBuhn, a se­nior di­rec­tor in the U.S. pub­lic fi­nance group at Fitch Rat­ings, said many of the cost-cut­ting mea­sures were es­sen­tially “stop-gap mea­sures” des­tined to be rolled back in com­ing years.

“Some of the ac­tions that or­ga­ni­za­tions took to main­tain prof­itabil­ity are mea­sures that re­ally can’t be sus­tain­able, par­tic­u­larly as it re­lates to wage freezes and some cur­tail­ment of ben­e­fits,” LeBuhn said, adding that the wide­spread halt in cap­i­tal in­vest­ments in fa­cil­i­ties and equip­ment can’t be sus­tained in the long run.

Caro­line Steinberg, vice pres­i­dent for trends anal­y­sis for the AHA, said that while gains in rev­enue in 2009 may have been faster than some ex­perts would have pre­dicted, the cap­i­tal isn’t des­tined to re­main in hos­pi­tal cof­fers for long.

“Hos­pi­tals are gear­ing up to make more

in­vest­ments in health in­for­ma­tion technology, and with all the dif­fi­cul­ties in the cap­i­tal mar­kets, hos­pi­tals are forced to look at self­fi­nanc­ing in­stead of bor­row­ing,” she said.

Fitzger­ald, how­ever, made the pre­dic­tion that 2010 will set fur­ther in­dus­try records for op­er­a­tional prof­itabil­ity, as the pa­tient vol­ume inches back to­ward pre-2008 lev­els with­out adding to the ba­sic hos­pi­tal cost struc­ture.

“We’ll look back on it and prob­a­bly sug­gest that there were cost re­duc­tions that could be ef­fec­tu­ated that had not been his­tor­i­cally, so this forced a hard look at ex­penses across the in­dus­try,” he said. “We would have rather had it not oc­cur, but pa­tient qual­ity has not suf­fered, and ac­cess to care has not suf­fered. We may look back and sug­gest it was good for the in­dus­try.”

With all of that op­er­at­ing rev­enue slosh­ing around the sys­tem af­ter the worst re­ces­sion in decades, health­care ob­servers say the in­dus­try ought to get ready to ex­plain its fig­ures to the pub­lic.

“From a PR stand­point, it’s go­ing to be hard to ar­gue that you need a big in­crease in your Medi­care re­im­burse­ments if you’re do­ing as well or bet­ter than you have for the past 25 years,” said Ge­orge Whet­sell, man­ag­ing di­rec­tor at Wellspring & Stock­amp, Huron Health­care. “They’re not mak­ing out­ra­geous prof­its, but to the de­gree that the num­bers say they’re do­ing as well as they have, it’s not the best PR sit­u­a­tion to be in.”

In terms of pa­tient rev­enue, many of the gains came from re­duc­tions in bad debt and other rev­enue-cy­cle im­prove­ments—and not from price in­creases, which are ei­ther ne­go­ti­ated with pay­ers or dic­tated by fed­eral and state gov­ern­ments, ex­perts said.

In the rev­enue cy­cle, hos­pi­tals have put far more fo­cus in the past few years on col­lect­ing co-pay­ments and de­ductibles at the point of care, Whet­sell said.

Even so, U.S. com­mu­nity hos­pi­tals—four­fifths of which are ex­empt from taxes—pro­vided $39.1 bil­lion in care for which they were not paid in 2009 ( See re­lated story, p. 10).

But ex­perts like Steven Rousso, se­nior prin­ci­pal with HFS Con­sul­tants in Oak­land, Calif., say the key to un­der­stand­ing the hos­pi­tal fi­nan­cial equa­tion is not rev­enue, but vol­ume.

Hos­pi­tals tend to draw rel­a­tively low profit from each pa­tient, since their over­head costs are so high. A Mod­ern Health­care anal­y­sis of the lat­est AHA statis­tics shows, for ex­am­ple, that hos­pi­tals earned just $84.43 in op­er­at­ing profit for each “ad­justed pa­tient day,” which is a mea­sure of the num­ber of hos­pi­tal in­pa­tients plus an equiv­a­lent amount of work re­quired for out­pa­tient care.

Yet the hos­pi­tals shoul­dered $10,045.15 in ex­penses for each ad­justed pa­tient day.

So if it cost more than $10,000 to make $84 in op­er­at­ing profit, hos­pi­tals needed a huge vol­ume to make ends meet. In 2009, hos­pi­tals treated 642 mil­lion out­pa­tients, in­clud­ing ER vis­its, and pro­vided 193 mil­lion days of in­pa­tient care. (For ref­er­ence, the U.S. Cen­sus Bureau pegged the na­tional pop­u­la­tion at 307 mil­lion that year.) Ob­servers said vol­ume trends were pro­foundly af­fected by the re­ces­sion, which caused mil­lions of Amer­i­cans to lose their health in­surance and de­lay elec­tive pro­ce­dures.

For ex­am­ple, 2009 was the first year in a decade and a half to see a sig­nif­i­cant de­crease in new in­pa­tient ad­mis­sions, which dropped by al­most 1%. The drop in to­tal in­pa­tient days was even starker than ad­mis­sions, down al­most 2%.

Emer­gency room vol­umes rose by al­most 4% in 2009, but that rise didn’t ap­pear to trans­late into more hos­pi­tal ad­mis­sions. “That does tell you peo­ple might be hav­ing trou­ble ac­cess­ing pri­mary care,” the AHA’s Steinberg said.

Sczygel­ski said the fi­nance and vol­ume trends seem des­tined to ex­ac­er­bate the di­vi­sion be­tween haves and have-nots in the U.S. health­care sys­tem.

“It’s be­com­ing al­most like two health­care sys­tems in this coun­try,” Sczygel­ski said. “The larger or­ga­ni­za­tions that have well-in­te­grated care, that are ge­o­graph­i­cally lo­cated for syn­ergy, they’re go­ing to con­tinue to do well. I think the smaller hos­pi­tals, the stand­alone or­ga­ni­za­tions are go­ing to con­tinue to strug­gle and lose money un­less they are cre­ative around mak­ing re­la­tion­ships with larger sys­tems.”

One sec­tion of hos­pi­tal fi­nan­cial state­ments that ex­perts said at­tracted far less anx­i­ety in 2009 than in years past was in­vest­ment per­for­mance.

In re­cent years, in­vest­ment port­fo­lios have proven to be by far the most volatile as­pects of hos­pi­tal rev­enue, boost­ing hos­pi­tal net prof­its to all-time highs un­der the me­te­oric rise in eq­uity value, and then re­tract­ing a decade’s worth of profit growth when the mar­kets tanked.

In fis­cal 2007, in­vest­ments added a whop­ping $17 bil­lion to their rev­enue state­ments, boost­ing what was oth­er­wise a ho-hum year for fis­cal per­for­mance to a 6.9% net mar­gin on $43 bil­lion in to­tal prof­its, which both were all-time highs.

Then in fis­cal 2008, many fis­cal of­fi­cers were forced to make mas­sive write-downs as the pre­vi­ous year’s in­vest­ment profit turned into a $4 bil­lion net loss that un­der ac­count­ing rules must be booked on rev­enue state­ments—in all, a stun­ning $21 bil­lion re­ver­sal for the in­dus­try.

In con­trast, in­vest­ment man­agers saw a mod­est $4 bil­lion in­vest­ment profit in 2009— about the same level of in­vest­ment in­come as was re­al­ized in 1994, the AHA fig­ures show.

Fitch Rat­ings’ LeBuhn said the up­heaval has caused bond an­a­lysts and health­care ex­ec­u­tives to re­new their fo­cus on op­er­a­tions, and to pay less at­ten­tion to their in­vest­ment port­fo­lios. “There has been a greater ap­pre­ci­a­tion for man­ag­ing those things that are in your con­trol,” LeBuhn said.

Steinberg said the $8 bil­lion neg­a­tive-topos­i­tive swing in­vest­ment per­for­mance in 2009 was sur­pris­ing for its speed, but she agreed that the ex­pe­ri­ence of the last few years has left many ex­ec­u­tives cir­cum­spect about their in­vest­ments.

Fitzger­ald said ex­penses were cut but sta­bil­ity re­mained.

Sczygel­ski: “Hope­fully the right story will be told.”

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