Trends in total hospital financial performance under the prospective payment system

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

* Hospitals that entered or dropped out of the industry at any time in the period 1985 through 1989 are excluded from the Medicare Cost Report File data tables but are included in the AHA survey data tables. Because more hospitals dropped out than entered, presumably associated with below-average financial performance or with mergers and acquisitions, our Medicare Cost Report tables differ from the AHA data. [TABULAR DATA OMITTED]

* Some PPS providers are defined as hospitals in the Medicare Cost Report File but are not included in the AHA data because they are not community hospitals as defined by AHA.

Generally, trends shown in Table 15 for revenues and expenses parallel trends for the same data shown in Tables 1 through 14, except that expenses per hospital from the AHA survey data generally increase faster than expenses per hospital from the Medicare Cost Report data. I attribute this factor primarily to lower productivity rate changes in the AHA survey data (Table 9), compared with productivity rate changes in the Medicare Cost Report data (Table 16).

These differences in productivity rate changes appear to be related to differences in the hospitals studied in the two sources. The AHA data include all hospitals reporting in the period, while the Medicare Cost Report data include only hospitals that succeeded in remaining in business for the entire period. Thus, it is no surprise that the Medicare Cost Report data show higher profits and profit rates than the AHA data (Table 1 and Table 14).

To supplement the analysis of trends in hospital income and expenses shown in Table 15, I have provided balance sheet data showing trends in assets, liabilities, and fund balances for the "typical" hospital in the Medicare Cost Report data (Table 17). Key relationships revealed by the balance sheets are shown in a series of ratios in Table 18. The ratio concepts and their import were obtained from Essentials of Hospital Finance by William O. Cleverly (1978).

* Liquidity ratios. Trends in measures of short-term liquidity indicate a relative decline in the average hospital's ability to meet its short-term obligations. The "current ratio" (i.e., the ratio of current assets to current liabilities) decreased steadily during the study period but still was above 2.00 at the end of 1989. Both the "days in accounts ratio" (net accounts receivable/operating revenues/365) and the uncollectible rate (uncollectible notes and accounts/operating revenues/365) increased during the period.

* Capital structure ratios. Trends in measures of long-term liquidity indicate a relative decline in the average hospital's ability to meet its long-term obligations. The ratio of fund balances to total assets, an indicator of the percentage of assets that has been financed with sources other than debt, declined over the period, while the ratio of long-term debt to fund balances and the ratio of long-term debt to fixed assets increased. [TABULAR DATA OMITTED]

* Activity ratios. Some measures of efficiency show upward trends over the period. Both the "total asset turnover ratio" (i.e., the ratio of operating revenues to total assets) and the "fixed asset turnover ratio" (i.e., the ratio of operating revenues to fixed assets) generally increased over the period. Another measure, the "current assets ratio" (i.e., the ratio of operating revenues to current assets), is stable. A final measure, the "accounts receivable turnover ratio" (i.e., the ratio of operating revenues to accounts receivable), is declining.