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Half of nation’s hospitals running losses (DS)

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Many plan to cut services and staff as investment returns worsen and paying admissions decline, research shows.
By Lisa Girion

March 2, 2009

The economic decline is continuing to ravage the nation’s hospitals, with half of them operating in the red and many planning service and staffing cuts, two new reports show.

Hospitals are ailing because of a number of problems hitting in close succession. First, hospitals’ investment incomes plummeted — like everybody’s — eliminating a cushion for operating budgets and curtailing capital spending.

Then, the mix of patients began to shift: Paying admissions declined as people put off elective procedures and insurers tightened their grip on the length of hospital stays they covered. And the number of patients without insurance or the means to pay their part of the bill began to rise.

These problems have been surfacing for several months. But new data show their breadth and depth. Indeed, an unprecedented 50% of the nation’s hospitals appear to be losing money, according to an analysis of government and proprietary data that Thomson Reuters is set to release today.

When the slide began, returns on investment were the primary culprit, according to Thomson’s analysis of data on a cross-section of hospitals. Total margins for every type of hospital — public, private, for-profit and nonprofit — declined in 2008, the analysis found.

Hospital operating margins — the extent to which operating income exceeds expenses — remained fairly consistent through the third quarter of 2008. But nonoperating margins, composed primarily of investment income, started to fall in late 2007, and the decline accelerated in mid-2008.

"This dragged down the median total margin to near zero and left approximately 50% of hospitals in the red," the analysis concluded. "When we compare these total margin statistics with historic data, we find that medians this low have not been observed before."

The 25% of hospitals in the worst shape posted margins below -7%, or 7% worse than the break-even point, while the top performers’ margins exceeded 4.5%.

Even operators of the most robust hospitals are bracing for another difficult year as the effects of layoffs and employer cuts in health insurance benefits take hold.

"We will see our charity care numbers go up as a result of the current economic situation, and we’ll also see our bad debt go up and people who are unable to pay their bills," said Deborah A. Proctor, the chief executive of St. Joseph Health System, based in Orange.

The nonprofit system — which runs 14 hospitals in California, New Mexico and Texas — ended its last fiscal year with a healthy 4.8% margin. That will be a tough mark to achieve this year because of the anticipated increase in uninsured and underinsured patients, Proctor said.

"It will hit all hospitals," she said. "Those who are already in negative revenues will probably see that get worse as things go along."

Forty-four percent of hospitals have seen declines in surgeries, with hip procedures showing the steepest drop-off at 45%, according to another new survey. As a result, 47% of the hospitals surveyed expect to make staff cuts, and 69% plan to cancel or delay equipment purchases, according to the survey by Novation, a company that manages supplier contracts for hospitals.

Novation has responded by demanding that vendors maintain or roll back prices on the goods they sell to hospitals.

"We know that the weakened economy has hit hospitals particularly hard, and they are being forced to make some tough decisions," said Novation President Jody Hatcher. "In November, we took a bold ‘no increase’ pricing stance."

Proctor said the St. Joseph hospitals may have to delay building projects and equipment purchases. But she said she did not anticipate layoffs or service cuts.

"We have to operate more effectively and more efficiently" to meet the needs of the growing ranks of uninsured and underinsured, she said. "However, it will not keep us from providing in those situations. That’s our mission. It’s always been our mission to serve the least among us."

The foundation arm of St. Joseph was set to make a down payment on a healthier future this year. It had long planned to roll out a $3-million, three-year attack on childhood obesity in Orange County through medical screenings, as well as nutrition and exercise programs in schools.

Proctor said the organization proceeded with the effort in spite of the economic downturn in the belief that it would eventually pay dividends for the community.

"We did not in any way back away from this program," she said. "This was a key commitment for us."