Recession Is Taking Toll on Large Hospital Bottom Lines

During the first quarter of fiscal 2009, more than half (54%) of the hospitals surveyed nationwide reported negative total margins. The greatest rate of hospitals reporting negative margins occurred among those with 500 or more beds (80%) and the lowest rate (36%) was reported among the smallest hospitals (those with less than 100 beds).

In addition, according to by the Healthcare Financial Management Association, nonoperating revenue declined 78% in all of the 263 hospitals participating in the survey, with 64% reporting a decrease of more than 20% in operating income. Again, the larger hospitals with more than 500 beds were most impacted with 79% saying they had decreases of more than 20%.

Also, patient revenue declined in 43% of those hospitals surveyed, with rural hospitals showing a greater impact (60% had a decline in patient revenue), compared with larger urban facilities (37%), according to the HFMA report released this month.

At the same time, 73% of those surveyed reported a decrease in days cash on hand: 96% of the hospitals with more than 500 beds indicated a decline, with 50% of those hospitals indicating that they had had a drop of 20% or more. The survey also showed that 43% of the responding hospitals had a decline in investment of 25% or more.

During the current economic recession, hospitals are "in a brand new territory where we aren't all sure how all the parts are fitting together at this point in time, said Randy Fuller, HFMA's Director of Thought Leadership. The recession has created many new questions that hospitals may have trouble answering right now.

"We have an engaged consumer that is bearing a big chunk of the burden for their own healthcare and see them delaying elective services. How much of that's really going to come back? What types of services are going to remain down the longest? What's the unemployment curve look like? When are the financial markets going to improve?" he said. "There are a lot of moving parts to this."

The survey found that 62% hospitals were responding to these economic conditions by putting budget contingency plans in place. These responses could be triggered by changes in: patient revenue or volume (typical triggers were declines of 5%, 10% or 20% in net patient revenue); operating margin targets (such as net operating income falling below 80% of budget); sustained declines (such as three consecutive months of undesirable performance); or failure to meet debt covenants (such as related to days cash on hand).

Other strategies are reducing capital spending, changing debt structure, reducing nonlabor costs, containing labor costs, enhancing productivity and efficiency, protecting cash flow, and increasing efforts to expand or protect volume.

"We've seen a big resistance on the part of CFOs to do just simple across the board freezes," Fuller said. "Most of the (chief financial officers) that I've talked to have been very thoughtful about making sure they are doing the right things and not ruining the culture of the organization--just really smart cost-cutting processes . . . rather than across-the-board budget freezes." Additional findings from the study can be viewed at www.hfma.org/pulse.