Hospital financials show improvement in early 2001

Margins are up, says Solucient study

The first two quarters of 2001 were better to hospitals than previous periods, according to a study released by the health care consulting firm Solucient. The Health of Our Nation’s Hospitals: Mid-Year Update, released in early November by the Evanston, IL-based company, reports that operating margins at the nations hospitals increased from 4.2% during the first half of 2000 to 5.2% during the same period this year.

Comprised of operational data from a wide array of nonprofit hospitals, major hospital systems and academic medical centers, Solucient’s data indicate that hospital operating margins still fall short of levels from before the Balanced Budget Act of 1997. The report continues: "Other factors that may contribute to this continuing lag include the release of adjusted Medicare payments rates in the Fall of 1999, as well as the implementation of the Health Care Financing Administration’s [now the Centers for Medicare and Medicaid Services; CMS] outpatient prospective payment system."

On a positive note, the study reports that first quarter 2001 operating margins are the highest since 1998, and there are other signs that the complete year figures for 2001 may be an improvement over last year. For instance, although there are seasonal patterns which indicate that the second half margins will be lower than the first half, the difference between quarter one and quarter two margins is lower this year than in the past, suggesting that 2001’s annual average margin will be higher than last year.

The margins do differ depending on hospital characteristics. Smaller facilities with fewer than 150 beds have higher margins than their counterparts with more than 300 beds. Medium-sized hospitals are feeling the pressure of lower reimbursement levels, but have made up for it by focusing on more profitable service lines.

One of those profitable service lines is cardiology, and another study released simultaneously by Solucient shows that the demand for cardiology services is destined to increase over the next several years. The study reports that demand for cardiology services is due to increase 44% more than the average of other service lines — 8.8% vs. 6.1% average — between now and 2006. Other service lines that many struggling hospitals find less profitable are nearly stagnant. For example, obstetrics is expected to increase by only 0.4%.

In the hospital report, Solucient also reported a regional difference in margins. Hospitals in the Northeast show the greatest improvement, with a mid-year 2001 operating margin of 6.96%, compared to a 2000 year-end margin of just under 5%. The South Central region continues to lag behind the rest of the country at a low level of 2.05%.

According to Solucient’s report, despite the better news, there is still a question about the industry’s sustainability. Health care costs are increasing at more than 7%, according to industry reports, the study notes. But since margins remain low, there is still long term financial risk for hospitals. The report continues: "[M]argins are well below a financially sustainable, healthy operating level, and are still below the industry margins prior to 1997. So, while there may be some indication of recovery, the seasonal shift in which fiscal performance traditionally diminishes after the first two quarters makes it premature to declare an industry-wide upturn." n