CMS says not-for-profit hospitals have stabilized - Industry Scan - Brief Article

Healthcare Financial Management, June, 2002

The hospital industry shows signs of recovery and stabilization, but continued cost pressures loom on the horizon, reports the Centers for Medicare and Medicaid Services (CMS) in its Health Care Industry Market Update for acute-care hospitals. Based on research reports from major investment banking firms, the CMS report says not-forprofit hospitals are recovering at differing rates, and current hospital profit margins are near the historical average. Strong not-for-profit hospitals have stabilized but face increasing investor scrutiny of their performance and disclosure, while weaker not-for-profit hospitals are in a "vicious cycle" of underinvestment in capital and dwindling market share, the report notes.

For-profit hospitals have exhibited solid growth and exceeded Wall Street's expectations, having "more than recovered from the payment squeeze of the 1990s," according to the report. Bond and equity investors are looking for predictability and a stable long-term payment policy. The inpatient market basket update drives almost $100 billion a year in hospital payments, making it the single most important payment variable for the hospital sector. If Congress decides to keep payments at the status quo, it will have to define what the status quo is, CMS states, citing as three options the historical median (market basket minus 1.9 percent), a continuation of current law (market basket minus 0.55 percent), or the full market basket update.

Taking exception to the CMS report, American Hospital Association President Dick Davidson noted that the report reflects Wall Street's view of a small segment of U.S. hospitals. He noted that nationally, one in three hospitals operates in the red, receiving payments that are less than the cost of delivering care. In addition, cost pressures are eroding the financial foundation of hospitals, making it harder to access needed capital to improve technology, facilities, and other services.