Trends in total hospital financial performance under the prospective payment system

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

* Profitability ratios. Measures of ability to meet financial requirements of the hospital generally show declines from early years of the PPS and stability in recent years. Both the "net profit rate" (i.e., the ratio of net profits to total net revenues) and the "return to total assets" (i.e., the ratio of net profits to total assets) remained relatively stable from the 1986 report year through the 1989 report year.

Any conclusion about the deterioration or improvement in the average hospital's ability to meet its future obligations that is based on the ratios obtained from balance sheets should be tempered by consideration of alternative financing procedures that hospitals have adopted in recent years. Many hospitals have shifted from purchasing capital stock to leasing capital stock in recent years. The dollar amounts of the leased capital stock do not appear in the hospital's balance sheet, which is restricted to descriptions of its own capital stock. However, leasing costs do appear as expenses and comprise an increasing proportion of capital-related and total expenses (Table 19). (Data on leasing costs are not explicitly shown in Medicare Cost Reports and, therefore, have been estimated in Table 19 from other data sources, particularly a recent U.S. Bureau of the Census survey of capital expenditures.)

No adequate national balance sheet data are available for pre-PPS periods. Therefore, it is not possible to determine whether the observed ratio trends in Table 18 represent a return to normal pre-PPS performance or whether they represent a significant departure from pre-PPS performance.

Acknowledgement

The author thanks David Gibson, Office of National Health Statistics, for his suggestions on methods for deriving hospital transaction prices and other members of the Office of National Health Statistics for their assistance in preparation of this article.

References

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Cleverly, W.O.: Essentials of Hospital Finance. Rockville, MD. Aspen Systems Corporation, 1978.

Donham, C.S., Maple, B.T., and Lemieux, J.A.: Health Care Indicators. Health Care Financing Review 12(2):139-158. HCFA Pub. No. 03316. Office of Research and Demonstrations, Health Care Financing Administration. Washington. U.S. Government Printing Office, Winter 1990.

Fuchs, V.: The Health Sector's Share of the Gross National Product. Science, Feb. 2, 1990.

U.S. Department of Labor, Bureau of Labor Statistics: CPI Detailed Report. Washington. U.S. Government Printing Office, 1984-89.