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Hospitals Rebound from Dismal 2008

John Commins, for HealthLeaders Media, November 9, 2009

One year after reporting that half of the nation's hospitals were running red ink, a new study released this morning finds that 80% of hospitals are back in black, with overall margins approaching levels not seen since the economy tanked.

"If they had a 401(k) statement to look at, it'd be lower than it was two years ago. But in terms of the operational financial statistics like margins and liquidity, it looks like hospitals in large part have returned to prerecession conditions," says Gary Pickens, chief research officer at the Center for Healthcare Improvement at Thomson Reuters, which produced the study.

"The market conditions have improved. Investment income is back. Hospitals no longer have to take realized losses. From a liquidity perspective, we have seen cash on hand rebound pretty substantially."

The study tracked 439 hospitals nationwide for key indicators, such as operating and total margins, reimbursement rates, patient volume, hospital employment and layoffs, and elective procedures through the second quarter of 2009.

The study found that:

  • Total operating margins grew from zero in the third quarter of 2008 to an average of 4% for all classes of hospitals in the second quarter of 2009.
  • 20% of hospitals had negative profit margins in the second quarter of 2009; this is an improvement over the first quarter of 2009 when 30% of hospitals were operating with negative margins and the third quarter of 2008 when 50% of hospitals were operating in the red.
  • Hospitals' "median days cash on hand" increased from 90 days in the first quarter of 2009 to 150 days for the second quarter, which is higher than the historic long-term average.
  • While hospitals have maintained staff levels per occupied bed throughout the recession, total labor costs are down approximately 2.25% for the second quarter of 2009. This reduction in labor expense per discharge has been achieved by reduction of length of stay.
  • Mean patient discharge volumes for all hospitals that had trended down shortly after the beginning of the recession turned positive in the second quarter of 2009.

Pickens says he's been most impressed by hospitals' ability to manage expenses throughout the downturn, not necessarily through draconian reductions like layoffs but with a greater focus on efficiencies. "It seems like hospitals have risen to the challenge and have been able to manage their expenses effectively. Have they reduced salaries? No. Have they reduced the per-patient staffing? No. What they appear to have done is decrease length of stay by 2% to 3%," he says.

"It remains to be seen if that is an overall positive and sustainable with respect to quality. We have to look at make sure that hasn't resulted in a bounce back in the form of higher readmissions. But that appears to be one way they have been able to decrease labor expense, by managing patients in the hospital out more rapidly."

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