Profit margins hold steady as hospitals contain costs

Not-for-profit hospitals stay afloat by containing costs

Profit margins at the nation’s not-forprofit hospitals held steady in 2011 even as top-line revenue slowed sharply, according to data in the annual statistical guide released last week by the American Hospital Association.

Hospitals were able to maintain financial stability by holding expenses in check for the second straight year, the report showed.

Hospitals have succeeded in containing cost by holding down labor costs despite a growing staff, said Caroline Steinberg, vice president of trends analysis for the AHA. The number of full-time staff at the nation’s 4,973 not-for-profit hospitals increased 1.1% in 2011, bringing the total to 4.03 million.

The number of registered and licensed practical nurses, who account for one in every four hospital employees, rose to 1.07 million in 2011, an increase of 1.6%. Their ranks rose 2.5% and 4.6% in 2010 and 2009, respectively, according to the AHA report.

That helped keep expenses in check. Hospitals reported $755.3 billion in revenue in 2011, up 3.3% from the previous year. It was one of the slowest increases in years. Hospital revenue grew by 5.9% the year before.

Expenses, meanwhile, grew 3.6% to $702.1 billion in 2011, only slightly higher than the 3.3% growth in expenses in 2010 over the previous year. As a result, profit margins barely changed, rising from $52.9 billion, or a 7.2% margin in 2010, to $53.2 billion, or 7%, in 2011.

The AHA financial report is consistent with findings released Friday by Standard & Poor’s. Its U.S. Not-For-Profit Healthcare Sector Outlook attributed slower top-line revenue growth to constraints on Medicare and Medicaid reimbursements and lower commercial insurance rates.

Martin Arrick, managing director for the ratings service, suggested declining revenue in the hospital sector is related to the Patient Protection and Affordable Care Act’s emphasis on ambulatory settings rather than hospital admissions for delivering care. Keeping patients out of hospitals will cut revenue in the short term, even if that means being in better position for long-term success.

“If you’re very successful at that, it con- tributes to declining admissions,” Arrick said. “If the bulk of your revenues come from fee for services, you’ve shot yourself in the foot, even if you’re trying to do the right thing in the biggest sense of the word.”

The trend was reflected in the AHA’s inpatient admissions data. Admissions fell by 306,342 in 2011, nearly a 1% decrease from 2010.

The constrained reimbursement climate is expected to have a major impact on hospitals’ access to credit markets. In 2013 and beyond, S&P’s Arrick projects the number of hospitals receiving either credit upgrades or downgrades to be about the same. Since 2010, S&P upgrades have outnumbered downgrades.

Hospitals may feel they’ve cut all they can, but efficiencies can still be improved, said Dale Surowitz, chief operating officer for Providence Health & Services’ Southern California division. Surowitz touts further physician engagement. “We have to find different ways to provide care and it’s going to have to be accomplished by working collaboratively in partnership with our physicians,” he said.

The AHA also reported last week that community hospitals offered about the same ratio of uncompensated care as previous years despite slowing top-line revenue growth. Uncompensated care totaled $41.1 billion or 5.4% of top-line revenue in 2011, no different than the 5.4% of top-line revenue or $39.3 billion given in uncompensated care in 2010.