Raking In Rebound: 80% of Hospitals in the Black

This year, as I bagged seemingly thousands of pounds of multi-colored leaves, it occurred to me that this is only the precursor to the real work. After all my leaves are all cleared away, I have back-breaking snow shoveling to look forward to.

That's when it hit me, raking is what hospital CFOs have been doing the last two years to get their financial yards in order (and things are starting to look decent), but with a host of other challenges ahead, including healthcare reform, it looks like the forecast is calling for snow, so CFOs had better prepare to start shoveling.

I'll explain, but first there is some good financial news for hospitals I want to share. You see, hospitals have been diligently analyzing areas of overspending these many months and your efforts are paying off; 80% of all hospitals are back in the black, according to a research paper Hospitals Continue Financial Recovery released today from The Center for Healthcare Improvement(CHI), a division of Thomson Reuters.

There's more good news: large community hospitals which were hit hardest by the recession—in Q4 2008 nearly 60% of large hospitals reported negative total margins—improved drastically, and now only 8% of facilities are in the red as of Q2 2009, the CHI report notes.

"Many hospitals have recovered to prerecession levels [for total margins]," says Gary Pickens, PhD, CHI Chief Research Officer and coauthor of the paper, which surveyed over 500 hospitals of various size and orientation.

There are a variety of ways CFOs could've tackled their market losses, including reduced salaries or reduced staff per bed, but for the most part that isn't the direction they pursued. The survey shows that FTE salary expenses actually rose by 3%-4% and only a small number of nonclinical contract labor declined. Where did the cost savings come from then?

"[Hospitals] reduced labor expense per discharge by reducing the length of stay; quite simply they put more patients through," Pickens says.

Kudos to all the hospital number-crunchers; your efforts paid off.

Forecast Calls for Snow
Alas, while the CHI findings certainly are very positive news, as I said at the beginning of this column, it's only the first part of the "yard clean up." It's about to snow and there is a slippery sidewalk and driveway you'll have to shovel clear.

I don't like pointing out the unpleasant truth, but the fact remains that many hospitals are still dealing with some seriously bad credit, and let's not forget that healthcare reform, in whatever form, will have a serious impact on the bottom line.

But first, many hospitals have to get their credit back up to snuff. Standard and Poor's July 2009 Ratings Roundup: Criteria-Related Reviews Kept U.S. Public Finance Rating Actions On A Positive Trend In The Second Quarter shows the negative rating trend persisting in Q2 2009 with 22 downgrades and five upgrades.

"Downgrades were slightly more prevalent among higher-rated credits; 56% of these occurred in the medium-to-high investment-grade categories and the remaining 44% were in the low investment-grade or speculative-grade categories," the S&P states. That's not good, at all.

Now you might think that the improvements in total margin that CHI reported would help the credit scores, and they will, but with all that lay ahead for healthcare, hospital CFOs are going to have to work extra hard to get things to tip in their favor. A few of the challenges S&P is concerned about regarding your credit rating:

• weaker revenues
• declining balance sheets
• a difficult economic environment
• rising pension contributions
• state budget stresses

"We believe that the recession is still taking a toll on the sector," the report says. "Therefore, the negative trends that emerged before the recession have now worsened with operational and non-operational losses increasing, resulting in diminished margins as well as weaker debt service coverage."

The S&P assessment also gives mention to the slower revenue growth, increasing levels of uncompensated care and bad debt, expense pressures (e.g., higher capital-related costs and softer volumes), and last (but by no means least) is Medicaid funding challenges, higher levels of uncompensated care and weaker revenues.

Not doubt about it, the CHI findings are very promising, but CFOs had better be prepared for a lot of financial flurry in 2010. I suggest that if you've managed to get your total margins under control that you get your shovel out now (and remember, bend with your knees and not at the waist, because with all you have on your hands, you can't afford throw your back out).