Friday, November 14, 2008

Financial crisis & hospitals (updated)

Hospital Construction Trends 1983-2007

Hospital Margins 1991-2006

Hospital Investment Income 1981-2006

Hospital Revenue Sources 1980-2006

Hospital Payment-to-Cost Ratios for different revenue sources

Over the past few years hospitals have been a bright spot in the economy. Although part of the overall national healthcare "crisis," and although some hospitals have been in the red, many other hospitals have been profitable (average margins have been improving since 2001, see graph); have been a source of job growth; and have also been responsible for a mini construction boom... However, with the current financial crisis, pressures are increasing and the omens are not good for hospitals to maintain their financial positions. These pressures are on several fronts:
  • The financial crisis has constricted access to capital and also has increased the cost of capital, hurting hospitals that need copious capital to continue to fund their investments in buildings, plant, and increasingly sophisticated capital equipment.
  • The turmoil and poor performance of the stock markets have hurt on several fronts. First, hospitals' investment income has fallen or become negative. Second, hospital endowments have taken a hit and have seriously shrunk. Third, as the economy weakens many wealthy benefactors are probably dialing back their philanthropic contributions. Fourth, many hospitals still have defined benefit retirement plans... market losses may have adversely effected the funding of these plans, requiring hospitals to use operating cash to shore up the funding of their pension plans.
  • The worsening economy is hurting hospital operating revenues and increasing operating costs on a number of fronts, including:
    • Layoffs swell the ranks of the uninsured, and degrade the abilities of self-pay patients. Employers respond by decreasing their employees' coverage and increasing co-pays. All of these result in increases in hospital unreimbursed expenses and bad debt.
    • Case volumes flatten as elective surgeries and procedures are postponed and put off, thereby reducing hospital revenues (note: often these items have higher margins)
    • People often put off seeking medical care - as a result they often are sicker when they go to the hospital, and often they end up using the hospitals' emergency departments, thus increasing ED usage and increasing hospital costs.
    • Insurance companies increase their scrutiny of hospital billings. This increases the length of time it takes to pay bills, thus hurting hospitals' cash flow. Rejections also increase, also hurting revenues.
    • A large portion (approximately 50% or more, see graph) of hospitals' revenue comes from federal and state governments. As these entities feel the pinch they reduce hospital payments / reimbursements (which already are often below costs, see graph above). This further pinches hospital revenues. Additionally, reimbursements for hospital acquired infections and other "never events" are being eliminated, Medicare is increasing its use of recovery audit contractors, etc., all also leading to decreased reimbursement.
All in all, the current financial crisis is putting additional pressures on the nation's hospitals. Some of the approximately 25% of hospitals that already have negative margins will risk going under, the ones with positive margins will see their margins degraded. Consolidations and mergers will increase as hospitals seek to respond to financial pressures. It is to be devoutly hoped that in their response to the financial pressures they are experiencing themselves, that federal and state governments do not cut so deep that they endanger the viability of the nation's hospitals...

Hospitals with negative margins

Trendwatch 2008
Hospital construction trends, Nov 8 2007

Ed. note: All graphs and charts here from the given links...

Updated November 19th:

Hospitals’ Response to the Current Financial Market from IMA Consulting's Insights makes the same points, albeit much more elegantly. In addition they point out that a worsening balance between revenues and expenses could violate existing bond covenants (from current debt), leading to increased expenses or the need for remediation that negatively impacts the hospitals... The article also suggests what the hospitals can do to reduce expenses.

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