Are These the Good Old Days?
Yes, bad debt is on the rise. Yes, hospitals are under increasing scrutiny of their charity care and collection policies. And yes, some nonprofit hospitals and systems live in fear that they will face an embarrassing public investigation by the IRS over their nonprofit status. Profitable health insurers continue to squeeze hospitals through a variety of pay-for-performance plans that have some administrators scratching their heads. To hear some tell it, even the future viability of the institution known as a “hospital” is in doubt, as full-service hospitals face increasing threats from physician-owned providers and other specialized ventures.
But don’t let the hype overwhelm you. There’s quite a silver lining in the dark cloud hanging over many hospitals.
Indeed, times have seldom been better, says Fitch Ratings. Hospital profitability is higher right now than at any time since 1998. Fitch says in its latest report that operating margins for nonprofit hospitals improved substantially in the 2005 fiscal year to 2.8 percent—a 33.3 percent increase over the 2.1 percent margin recorded in 2004. Even better, excess margins increased in 2005 to 4.8 percent from 3.7 percent in 2004. Days cash on hand and debt service coverage improved markedly, and Standard & Poor’s predicts good hospital performance in 2006 after credit upgrades outpaced downgrades for the first time in seven years.
The blockbuster buyout deal to take Nashville’s HCA Inc. private is just more proof that hospitals are doing better than you might think based on the negativity surrounding the sector. The Frist family, Bain Capital, Merrill Lynch and Kohlberg Kravis Roberts & Co. agreed to relieve HCA shareholders from the pain of a stock that has stagnated in the face of negative news about patients who can't or won’t pay their hospital bills—aka bad debt.
They paid an 18 percent premium over HCA’s stock price at the time to take over the nation’s largest for-profit hospital chain. Do you think they believed the hype? The Frists have done this going-private thing before with HCA and come out quite well.
So yes, hospitals on the whole could be doing better, but not much. As a group, prospects are brighter than at any time since Congress forced a haircut with the Balanced Budget Act of 1997. The Frist family—and other savvy investors—are betting that underappreciated performance will continue as the baby boom generation goes geriatric.
We shouldn’t get carried away with this rosy scenario for hospitals. Many do face real challenges generating enough margin to meet their mission. But thanks to better management and business practices, hospitals with such severe problems are solidly in the minority.—Philip Betbeze