Declining operating margins show U.S. hospitals still face challenges

Healthcare Financial Management, Feb, 2006

Recent analysis of key hospital operating indicators show hospitals continue to post lower operating margins since the Balanced Budget Act of 1997. The operating margin for the average hospital in 2004 was 4.0 percent, a decline of 20 percent from the 5.05 percent average operating margin in 2003. This low level of financial performance suggests a continued long-term risk for the sustainable operation of many U.S. hospitals.

Among other key findings:

> All bed sizes and regional groups recorded weaker operating margins in 2004 than in 2003.

> Regional variation in case-mix-adjusted length of stay underlined regional differences in the cost of operations and operating margin. Median LOS in 2004 for the Northeast region was 4.32 days, about 11 percent higher than the all-hospitals median of 3.89 days. Meanwhile, operating margins in the Northeast region averaged 2.86 percent, compared with the 4.04 percent average for all hospitals.

> As LOS for the nation's hospitals has decreased steadily during the past eight years, the median case-mix index has been increasing slowly and steadily. In 1997, the median case-mix index for all patients was 1.118; in 2004, it was 1.219.

> Average cost per adjusted discharge continued to rise, increasing to $7,041 for all hospitals in 2004. This increase is not related to declines in volume; rather, it represents a significant increase in the cost of operations.

> Total spending on capital as a percentage of total operating expense has maintained a steady decline.

This month's Data Trends was developed by Solucient, LLC, based on analysis of data from more than 750 hospitals. The data were correlated to Medicare cost report information and then weighted so the averages described reflect the average experience of all U.S. hospitals. Additional details can be found in the report The Health of Our Nation's Hospitals, 1997-2004, which is available to download at www.solucient.com. For more information, please contact Phil Gaughan at pgaughan@solucient.com.

AVERAGE HOSPITAL OPERATING MARGIN BY YEAR, 1997-2004

1997   5.31
1998   4.05
1999   3.39
2000   3.86
2001   4.54
2002   4.26
2003   5.05
2004   4.04

Note: Table made from bar graph.

AVERAGE COST PER ADJUSTED DISCHARGE, 1997-2004

1997   $5,302
1998   $5,500
1999   $5,640
2000   $5,752
2001   $6,137
2002   $6,683
2003   $6,709
2004   $7,041

Note: Table made from bar graph.