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Financial Outlook for California Hospitals Improves, Despite Plummeting Investment Income

Cheryl Clark, for HealthLeaders Media, October 23, 2009

The latest financial charts from California hint that hospitals in the Golden State might be starting to emerge from the recession.

They show total margin, which in the 4th quarter of 2008 had dropped to -4.9%, and operating margin, which had dipped to -1.1%, on an upward trajectory to +8.1% and +3% by the second quarter of 2009.

And they show that the percentage of the 387 hospitals operating with a negative operating margin going downward, from 50.1% in 2004 to 41.5% in 2008. The percentage of hospitals with negative total margins declined as well, from 41.3% to 34.6%.

"Just since the 4th quarter of 2008, things do appear to be going in a different direction.," says Kenny Kwong, accounting and reporting section manager for the Office of Statewide Health Planning and Development (OSHPD), the agency that keeps the largest state database of hospital financial and utilization information in the country.

Representatives of the California Hospital Association aren't so sure, and say many hospitals have been hit with an unprecedented number of fiscal pressures from which they may take much longer to recover, including the increase of underfunded patients and the state's daunting seismic mandates.

Hospitals have suffered enormously because of a precipitous drop in their investment portfolio, the charts show. Investment income reported to those hospitals in 2004 of $427 million went to $486 million in 2005, to $803 million in 2006, to a little over $1 billion in 2007, but plummeted in 2008 to $134 million.

"The data definitely support the fact that their investment income went way down," Kwong says.

OSHPD's data represents about 85% of the state's 450 hospitals. Those affiliated with Kaiser Permanente, the military, and the Veterans' Administration, state hospitals, psychiatric facilities, Shriner's hospitals, and long-term care emphasis hospitals are excluded.

Anne McLeod, vice president of finance policy for the California Hospital Association, says it's way too soon to even think that hospitals might be coming out of financial darkness.  "I can't speculate what the numbers are going to look like," she says. "Our hospitals have reported to us they've taken significant hits on any investment portfolios they've had and seen significant increases in expenses for interest on capital cost."

Many hospitals said they have lost their bond covenant agreements because they lack cash flow or cash on hand.

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