Hospitals report mixed financial results in 1990

Healthcare Financial Management, Nov, 1991

High-performance hospitals continued to produce strong results in 1990, while low-performance hospitals continued to decline, according to data from HFMA's 1991 Hospital Finance Almanac.

The almanac includes an analysis of audited financial statements from HFMA's Financial Analysis Service (FAS) database for the five years from 1986 through 1990.

Although the database contains more than 2,300 hospitals for FY90 and more than 3,000 hospitals for preceding years, a constant sample size of more than 1,300 was used to examine the trends, according to Dave Strickland, HFMA's director of financial database services. The almanac also provides trend data for HFMA's Strategic Operating Indicator (SOI) database.

"HFMA's data suggest that strong hospitals are getting stronger, while weak hospitals are getting weaker," said HFMA President Richard L. Clarke, FHFMA. "The mix of Medicare and Medicaid patients and extent of local regulation are among the variables that affect management's ability to deal with underpayment, volume, change, and overall certainty about the future of the healthcare industry."

Performance results

For the first time, the FAS constant sample database was divided into high-performance and low-performance facilities. The return on investment (ROI) price-level-adjusted ratio, which measures a hospital's actual return on investment and removes the effects of inflation was used to distinguish the groups. Hospitals that produced an ROI of more than 12 percent were considered high performers, while hospitals that produced ROIs of less than 7 percent fell into the low-performance group, Clarke said.

Three-hundred-eighty hospitals were identified as high performance, and 236 facilities were classified as low performance.

Operating margin -- which measures the percentage of operating revenue retained as profit--improved for high-performance hospitals, the report showed. High-performance hospitals earned 6.2 percent in 1990, compared to -1.7 percent for low-performance hospitals.

Liquidity, which measures an organization's ability to provide funding for financial needs, also varied between high-and low-performance hospitals. Days cash on hand ratio, which is used as an indicator of an organization's liquidity, was 21.6 for high-performance hospitals and 15.2 for low-performance facilities.

"These data suggest that high-performance hospitals usually are able to fund their liquidity needs because they generate more surplus cash from profits," Clarke said. "Low-performance hospitals generally are not successful."

Showing improvement

High-performance hospitals also are consistently better at collecting accounts receivable than low-performance facilities, the report showed. In 1990, the high-performance group had 74.4 days in accounts receivable, five days less than low-performance facilities. This is the first time the ratio has dropped since HFMA began collecting financial data in 1984, Clarke said.

This ratio shows that hospitals are making a "major effort" to decrease days in receivables despite efforts by major payers (such as Medicare, Medicaid, and Blue Cross, and other commercial insurers) to slow down payments, he said. Automated collection procedures may be a factor in hospitals' collecting bills faster, he added.

The FAS data also reported that the average age of plant ratio--which measures the accounting age of physical assets used by hospitals--increased to 7.6 years in 1990. The average age of plant for high-performance hospitals was about 33 percent younger than low-performance hospitals, Clarke said.

"Contrary to healthcare policy analysts' contentions that hospitals are spending increasing amounts of money on new technology, this difference suggests that low-performance hospitals have limited access to financing and a limited ability to fund capital reserves," he said.

Several characteristics separate high-and low-performance hospitals, Clarke said. Based on indicators from the SOI database, low-performance hospitals report significantly higher costs than the high-performance hospitals, longer lengths of stay, and larger Medicare and Medicaid patient loads. They also tend to be located in highly regulated states.

To help improve their situations, Clarke suggested that low-performance facilities should examine their cost structures and try to reduce costs in every possible area, such as shutting down or curtailing unprofitable services.