Hospital Operations Feel the Pressure

Tightening financial markets and decreasing credit availability are having a negative effect on hospital revenues. High interest rates, decreasing reimbursements, a decline in patient payments, high commodity prices, and bad debt are restricting/negatively affecting hospital operating margins.

1. Interest Rates
   Hospitals face high interest rates as their credit ratings continue to deteriorate. Moody’s has downgraded not-for-profit hospitals and investor-owned hospital company ratings from stable to negative. The bursting of the housing market bubble resulted in fluctuations in primary mortgage rates (see chart below). These rates are indicators for variable interest rates used by hospitals; rates that have hit as high as 10% to 18% in some markets during the past year.
   
   
2. Reimbursement Rates Decline
   Hospitals received $0.91 for Medicare patients and $0.81 for Medicaid patients for every dollar they spent. Underpayments by Medicare and Medicaid have increased from $3.9 billion in 2000 to $31.9 billion in 2007. With tax income declining and states facing tightening budgets, reimbursement spend will likely be one of the first places officials look to save money. States like Connecticut are projecting a need to cut $300 million from the entire state budget.
   
3. Patient Payments
   The trickle-down effect to the patient level is becoming clear. The credit crunch has negatively impacted industries, resulting in job loss and less spend overall. More than 516,000 people filed for unemployment since the U.S. Department of Labor’s announcement on Nov. 7 that the unemployment rate was at 6.5 percent. The Kaiser Commission on Medicaid and the Uninsured in April indicated that 1% in unemployment equates to roughly 1.1 million people without health insurance. Additionally, inpatient admissions were down approximately 2% to 3% in September. In summary, fewer people are going to hospitals because they have less ability to pay for care. If care is required, many are going to the emergency room and not paying. There are fewer potential patients for elective surgeries and there are indications that government will continue to cut reimbursements to hospitals for procedures that are currently covered.
   
4. Commodity Costs
   The trend toward higher commodity costs has been reported by HIDA in several pieces including, Navigating the Perfect Storm: Understanding the Steep Rise in Supply Chain Costs. The upswing in commodity prices is also impacting hospital operating margins. The issue is bigger than fuel prices, as changes to international tax policies, unfavorable exchange rates, and increased competition in the world market for supplies drives up the costs of many raw materials and the ability to delivery them to end users at a lower cost.
   
5. Bad Debt
   Eighty percent of healthcare finance executives said in a recent poll that they expect an increase in unpaid medical bills. This past year, Accession Health’s “bad debt” increased by $167 million; Catholic Healthcare West’s bad debt also increased by $98 million. These larger health systems provide an early indicator of the concerns mid-size and smaller hospitals may already be experiencing.

Impact:
Due to the limited availability of credit and increased pressure from the aforementioned factors, hospitals are being forced to rethink their business practices. In 2001, when there was a brief eight-month recession, community hospitals still saw a 4.2% profit margin, all the while hiring more employees. In the current economy hospitals have laid off staff, including roughly 5,000+ healthcare workers since September. It is fair to forecast that 2008-2009 profit margins will be less substantial when compared to last year’s margins.

Conclusions

• Hospitals face many factors that squeeze their operating margins.
• Business and financial practices in hospitals are changing quickly.
• The full impact of the new financial pressures on hospitals and the healthcare industry is evolving and multi-faceted.