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Hospital Operating Pressures Mounting

Philip Betbeze, Senior Editor, Finance, August 27, 2007

Thanks to better operational controls and financial discipline--among other macroeconomic trends like low interest rates and relatively favorable Medicare reimbursement rates--hospitals are doing pretty well when measured against their historical business performance.

But like a storm blowing up on the horizon, operating pressures are mounting on hospitals, says a report from Moody's Investors Service, one of the three rating agencies that perhaps have the best long-term insight into where the hospital industry as a group is heading in the near and intermediate future. While maintaining its stable outlook on the industry, Moody's sees potentially strong headwinds ahead, as I mentioned briefly in last week's column.

The biggest sign of potential trouble on the horizon, says Lisa Martin, the report's author, is that hospitals' revenue growth rate slackened in 2006 while expenses rose. As these two measures crossed each other in the night sometime between 2005 and 2006, Moody's started to realize the potential for hospital performance declines in the coming years if the trends continue.

For instance, hospitals' revenue growth rate in 2006 of 7.6 percent dropped off sharply from 2005's growth rate of 8.5 percent. Meanwhile, an expense growth rate of 7.8 percent in 2006 overshadowed a growth rate of 7.5 percent in 2005.

Much of this slowdown can be attributed to the usual suspects, says Martin, like growing bad debt expense, slower growth in Medicare and commercial insurance rate increases, modest volume growth and charity care expense growth. Also, employee health benefit expenses are growing strong and supply expenses for hospitals aren't getting any cheaper, despite the innovative supply chain initiatives that hospitals have undertaken in recent years to rein in those costs.

My question is this: Broad, nationwide statistics tell one story, but individual anecdotes often tell quite another. I'm looking for some reader feedback here. What are you CFOs seeing? This is your chance to brag a little bit about what you've done to improve your business over the past few years.

I've done story after story in HealthLeaders magazine about the innovative ways you have been able to trim the fat in your enterprises. Certainly bad debt will always be there and is increasing, and the ranks of the uninsured continue to grow. But my sense is that many hospitals are run more efficiently than ever.

Where are you making progress? What strategies have you used to mitigate these headwinds? I'd love to hear back from you and use your responses for a future column or story. HealthLeaders is all about sharing viable strategies among peers, so please take a moment to jot down a note about your business outlook and e-mail me at the address below.

How are you dealing with anemic patient volumes?

What are you doing about mitigating growing supply expenses?

How are you ameliorating the threat to your business from increasing physician competition?

How are you making your organizations more consumer-friendly?

Thanks in advance for your responses, and as usual, I'm open to constructive criticism about this newsletter. This is a new newsletter, so please bear with us, and we'll continue to improve, as you have.


Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at pbetbeze@healthleadersmedia.com.

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