March 3, 2009

Study Finds Median Hospital Profits Now At Zero

Median profit margins for hospitals in the United States have fallen to zero, according to a new analysis of hospital finances published Monday by Thompson Reuters.

The analysis found that half of the more than 400 hospitals in the U.S. are now losing money, according to the report.

However, other revenue sources have not declined for most hospitals, according to Gary Pickens, chief research officer for Thomson Reuters Healthcare, a division of Thomson Reuters Corp.

"Just like it hurts when people open up their 401(k) statements, it is like that for hospitals only much, much worse," the Reuters report quoted Pickens as saying.

"This is something we haven't really ever seen before."

"Hospitals are facing unprecedented economic stress and many of the indicators we're seeing suggest that things will get worse before they get better."

Hospitals typically operate on profit margins of about 3 percent to 4 percent, so they have little tolerance for declining profits, Pickens added.

"While operating margins are generally holding steady, non-operating margins have all but disappeared from hospital balance sheets. That makes it difficult for hospitals to secure financing for new equipment and to fund expansion efforts."

In conducting the study, Thomson Reuters Healthcare monitored more than 20 financial indicators at 439 U.S. hospitals, including revenue and profit, or total margin for non-profit hospitals, closures, reimbursement rates, employment levels, inpatient volume and frequency of elective medical treatments.

The results showed that the median margin among all 439 hospitals was zero percent in the third quarter of 2008, the lowest on record.  Half the hospitals were unprofitable during that quarter. And while payments received from Medicare, Medicaid and private insurers grew, they did so at a declining rate through the end of 2008. 

Median cash-on-hand also reached a record low during the third quarter of 2008, illustrating the effect the credit crisis has had on liquidity.

The study found no indications of bed closures, mass layoffs, declining patient volumes or a decline in elective procedures.

"In terms of what they can do, they are a little bit between a rock and a hard place," said Pickens.

"The demand for their services is continuing."

Reducing labor costs is not an option, Pickens said.

Instead, "they should focus on efficiency."

Pickens cited a study published in the New England Journal of Medicine last week that showed large geographical variations in spending on certain medical procedures throughout the U.S., with little difference in outcome. The study demonstrates that it is possible to spend less and still help patients, Pickens said.


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