Trends in total hospital financial performance under the prospective payment system

Health Care Financing Review, Spring, 1992 by Charles R. Fisher

Trends in net revenues

Although expenses per PPS hospital rose rapidly in recent years as a result of rising outputs and input resource prices, the average PPS hospital was able to maintain its pre-PPS profit rates by rapidly increasing its net revenues. Some erosion of profit margins is observed in recent periods, beginning from the relatively high profit rate observed in the early PPS period. These trends are summarized in Table 12, which shows specific amounts for the identity:

Net revenues = (Expenses) X (Net Revenues/Expenses)

Table 12 shows that hospital net revenues have kept pace with increasing costs in recent years. The table also indicates that rising input prices have been a consistent contributor throughout the study period, accounting for more than one-half of growth in net revenues in recent years. Rising outputs were another major source of increase in all other years except 1984 and 1985, when net profits replaced them.

Hospital expenditures and economic growth

Total expenditures for hospital care (i.e., net revenues) are the product of average net revenues per [TABULAR DATA OMITTED]

hospital and the number of hospitals. Although average net revenues per hospital increased steadily over the study period, the number of hospitals steadily decreased. Therefore, in order to estimate changes in total hospital expenditures, the rates of change in average revenues per hospital and in outputs per hospital obtained in prior sections must be adjusted by changes in the number of hospitals. These adjustments to hospital revenues and outputs are shown in Table 13.

Net hospital revenues consistently grew more rapidly than the GNP before PPS was implemented in FY 1984, grew less than the GNP in the initial PPS period, and resumed faster growth in the later PPS period. By 1989, hospital revenues grew nearly 2 percentage points faster than the GNP (Table 13). The major eras of changing growth patterns were:

* 1977 through 1979, the industry's effective VE cost-control period, when hospital revenues exceeded GNP growth by 1.6 percent annually.

* 1979 through 1983, an era with no effective cost-control program, when hospital revenues exceeded GNP growth by 7.8 percent annually.

* 1983 through 1985, the PPS implementation period, when hospital revenues grew 2.1 percent less annually than the GNP.

* 1985 through 1989, the later PPS implementation period, when hospital revenues grew 1.3 percentage points faster than the GNP.

Hospital total output transaction prices grew substantially faster than general prices (as measured by the GNP implicit price deflator) in all years of the study except 1986 and 1987, when third-party payers, particularly Medicare, sharply limited rates of increase in payment rates.

Hospital real outputs generally grew less than real outputs in the general economy during the initial periods of the two hospital cost-containment programs implemented in the study period. Thus, real hospital outputs grew less than general real economic growth in the VE period and again in the initial PPS period. Changes in hospital real outputs tended to exceed changes in general economy real outputs in all other periods (Table 13 and Figure 3).