Hopitals post big profits in 2012
Hospital profit margins hit highest level in decades
Community hospitals collectively enjoyed a record-breaking margin in 2010 with more than $52.9 million in total profits, according to the American Hospital Association. The 7.2% net margin on $730.9 billion in net revenue, tallied in the 2012 AHA Hospital Statistics guide released last week, was the highest in decades. The results compare with $34.4 billion in profit in 2009 for a 5% profit margin on $690.5 billion in net revenue. The figures came from 4,985 AHA members surveyed by the Chicago-based group.
“We’re mildly surprised, not overly surprised,” said Jim Lebuhn, a senior director in the U.S. public finance group for Fitch Ratings in Chicago. “What you’re seeing is the industry is really positioning itself for further implementation of healthcare reform.”
While preparing for declining Medicare and Medicaid reimbursements, hospital officials and Lebuhn said the record-breaking numbers show that hospitals are streamlining expenses and cutting costs, although overall expenses actually climbed by 3.3% in 2010, or $21.8 billion. Hospitals spent $678 billion in 2010 versus $656.2 billion the year before.
The increased margins mean hospitals are spending less on supplies, working with doctors to better determine what equipment is needed for hospitals, using more generic drugs and tightening administrative costs, said Caroline Steinberg, the AHA’S vice president of trends analysis. “Hospitals are really shoring up for tough times ahead.”
The cost of payrolls and benefits, however, continues to rise, increasing to $348.1 billion in 2010, compared with $338 billion the year before. Hospitals spent about the same percentage of their budgets on labor-related costs; payrolls and benefits accounted for 51.3% of budgets in 2010, compared with 51.5% in 2009.
Steinberg warned that the record-breaking profit margin did not provide observers with a full financial picture, suggesting that conditions weren’t so rosy for hospitals. “This data only provides a snapshot of the financial state in 2012, as the landscape has changed dramatically over the last year,” Steinberg said.
She pointed out that 23% of hospitals surveyed lost money in 2010. She also stressed that the results reflect financial conditions in 2010, and she said federal stimulus money flowing to hospitals through Medicaid programs has since dried up.
William Petasnick, president and CEO of 500-bed Froedtert Hospital in Milwaukee, said he shares Steinberg’s view. He said outlier hospitals that turn high profits are skewing the averages. Hospitals in the Midwest, such as Froedtert, are hurting from declining Medicare and Medicaid reimbursement. “Unemployment numbers are still high and long-term unemployment, especially,” Petasnik said. “Here in the Midwest, we’re not seeing much change in that, and that’s all driving Medicaid enrollment.”
The AHA also released its latest report on uncompensated care. That showed community hospitals delivered $39.3 billion in uncompensated care in 2010, a $200 million increase over 2009. The 2010 amount represents 5.8% of the expenses in 2010. That breaks down to about $7.9 million per hospital in 2010, up from $7.8 million per hospital in 2009 when a larger number of hospitals—5,008—were surveyed. In 2009, uncompensated care represented 6% of the expenses that year.
Uncompensated care is the dollar amount of charity care for the medically indigent and uninsured combined with the amount of hospitals’ bad debt.
Lebuhn said Fitch expected to see the slight increase in uncompensated care, but doesn’t expect to see drastic increases in the future, under the belief the economy has stabilized and unemployment numbers will continue to decrease. The U.S. Bureau of Labor Statistics released numbers last week showing the unemployment rate at 8.5%, the lowest in three years.
Hospitals should be praised for improving their efficiency and accomplishing more with fewer staff members, Lebuhn added. However, it’s unrealistic to expect record profit margins to continue as federal reimbursement continues to fall, he said. “As we move into the full implementation of reform, I think that again, you’ll see those margins compressed.”
When those declines will happen and how steep they will be is difficult to forecast, Lebuhn said, adding that operating revenue may be the first to fall. Community hospitals reported $717.7 billion in operating revenue for $39.7 billion in operating profit in 2010. That makes for a 5.5% operating margin, up from 4.4% in 2009 when operating revenue was $686 billion and operating profit was $29.9 billion. The 2010 operating margin also was the highest in decades.