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.
There also have been significant increases in the number of uninsured and Medi-Cal (Medicaid) patients, for whom government reimbursement dollars do not come near to matching costs, and a decrease in volume for elective procedures. "Consumers are making a choice to not get care because they don't want to pay deductibles or because they lost their job and lost their coverage," McLeod says.
"Based on those elements, we anticipate not seeing a very good picture when the annual reports finally come out," McLeod emphasizes.
In July, the CHA issued a report, "California Hospitals and the Economy — Ongoing Credit Crisis Jeopardizes Seismic Compliance Mandate," which called the recession's impact on hospitals "unprecedented."
"More than a quarter of hospitals statewide (28%) have seen interest expenses increase in the first quarter of 2009, while many others have been frozen out of the credit market entirely. As a result, hospitals across the Golden State are faced with limited access to capital and increased cost of borrowing," it says.
What's worse for hospitals in California is that many of them will soon be forced by state laws to make seismic improvements—some even rebuilding their entire hospitals—by 2013 or 2020 or 2030 or else shut down. The Rand Corporation estimates the price tag for seismic hospital retrofit is $110 billion, not including financing costs.
In summary, McLeod says, "California hospitals are taking hit from all sides."