Hospital Profits Remained Low in FYOO, with Little Relief in Sight - Brief Article

Healthcare Financial Management, July, 2001

Based on analysis drawn from both Medicare cost report (MCR) data and proprietary benchmarking information, a majority of hospitals are continuing to struggle financially. The MCR data revealed that the average hospital profit margin for 1999 was only 1.8 percent, down from 2.5 percent in 1998 and 4.2 percent in 1997 for the same set of hospitals (see Exhibit 1). Of these hospitals, 68.4 percent showed at least a small profit in 1998, but only 65 percent did so in 1999.

Though comprehensive MCR data for 2000 will not be available for many months, early results indicate profits may not decline as precipitously as in previous years. Further analysis using proprietary, operational, benchmarking data pointed to a decline in hospital profits from 6.3 percent in 1999 to 5.6 percent in 2000, although the 0.7 percent change is not statistically significant (p = 0.17). Similar analysis comparing 1998 and 1999 profits showed a decline of 1.6 percent (p [less than] 0.01). [a]

Exhibit 2 highlights certain key indicators that currently are driving profitability Most importantly, between 1998 and 1999, hospitals saw expenses rise by 5.9 percent, while revenue increased by only 4.9 percent. This difference ate into profit margins. Between 1999 and 2000, that difference had been cut in half, with expenses up by 6.9 percent and revenue up by 6.4 percent. For 2001, CFOs clearly would like to see revenues grow faster than expenses.

One aspect of the drive to reduce expenses is seen in the number of FTEs, which has risen more slowly than average daily census. As a result, the number of hours worked per discharge has been decreasing. On the other hand, nonlabor expense per discharge rose by 5.3 percent between 1999 and 2000, indicating an area that may deserve--and profit from--additional attention. In addition to highlighting trends, healthcare executives can find possible solutions to such ongoing cost management issues by utilizing benchmarking resources to find opportunities for improvement.

(a.) Comparative data are drawn from the proprietary database offered through the Healthcare Solutions Group of GE Medical Systems. The operational database, maintained since 1983, includes 824 hospitals. For this study, financial and operational data were drawn from 205 client hospitals. Although the hospitals cannot be viewed as a statistical random sample, they do include facilities from 39 states, ranging from community hospitals to major teaching institutions. All per-discharge indicators were adjusted for inpatient/outpatient mix, case-mix index, and regional wage index. Further details regarding the methodology of this study, as well as more detailed indicators, can be found at www.gemedicathcs.com.

[Graph omitted]

[Graph omitted]