Hospital Recovery Appears V-shaped

Economists are debating whether the nation is enduring a U-shaped or a V-shaped recession. The U-shaped recession means a more gradual recovery—particularly one that sees limited if any job growth. The V-shaped recession tanks quickly and recovers quickly, too.

The overall economy appears to suffering from a bad case of U-shape. Record levels of unemployment are not expected to be alleviated until well into next year, if then.

For hospitals, however, a rich vein of raw data, reports, and surveys released over the last several weeks, give us a good idea of how difficult 2008 was, but also suggest that hospitals are now operating on the upward side of the V.

For starters, the American Hospital Association Hospital Statistics for 2010 guide  reported that the nation's 5,010 nonfederal community hospitals saw profits fall to $17 billion in recession-wracked 2008, thanks in large part to investment losses that accounted for $4.4 billion in red ink. The losses, contrasting with the record $17 billion in investment income in 2007, means that hospitals saw a negative swing of $21.4 billion in investment income over two years, as overall net profits fell by about 60%, from $43.1 billion in 2007, to $17 billion in 2008.

A separate report from the Center for Healthcare Improvement at Thomson Reuters found that 80% of hospitals were back in black by the second quarter of 2009, with overall margins approaching levels not seen since the economy tanked. In 2008, the same report found that half of the nation's hospitals were bleeding red ink.

"If they had a 401(k) statement to look at, it'd be lower than it was two years ago. But in terms of the operational financial statistics like margins and liquidity, it looks like hospitals in large part have returned to prerecession conditions," Gary Pickens, the study's author, told HealthLeaders Media when the report was released. "The market conditions have improved. Investment income is back. Hospitals no longer have to take realized losses. From a liquidity perspective, we have seen cash on hand rebound pretty substantially."

Finally, monthly employment data issued by the Bureau of Labor Statistics found that the nation's hospitals reported a surge of 10,000 payroll additions in October, even as the overall unemployment rate hit a 26-year high of 10.2%. October represents the largest single month of hospital job growth since December 2008. In September, hospitals added 7,300 jobs, and the two months account for nearly half of the 37,500 hospital payroll additions reported so far 2009.

Have hospitals gotten their hiring mojo back?

David Bachman, a Cleveland-based independent healthcare analyst, believes they have. "There has been an improvement at the hospital level that has allowed them to ease up on the cost containments," he says. "To the extent that they can, hospitals do not want to get caught not operating at appropriate levels in terms of staffing because that is going to hurt them in the long run. Job growth may not come back to historical levels, but over the next 12 months it will definitely be up from what we have seen through much of this year."

Along with their recovering investment portfolios, Bachman says hospitals are also becoming less anxious with the idea of healthcare reform. "In the last couple of months, that picture is looking better than people had initially thought," he says.

There are icebergs bobbing out there, however. Bachman says a sustained recovery for hospitals will have to be accompanied by a sustained recovery for their investment income, and with the overall economy. "If we see the stock market take another dip, that is going to have a direct and indirect impact on hospitals," he says.

But he suggests that a slightly bearish economy would not be completely bad for hospitals. "As I've looked at hospital operating margins this year, a huge source of their operating efficiency gains have been on lower salary and wage costs. Some of that has come from more subdued hiring but a lot of it has come from lower turnover," he says.

"The overall unemployment figures look pretty weak, and that could work in the favor of hospitals in terms of their keeping their salary and benefits inflation in check." Of course, fewer people working in the overall economy means more charity or government-sponsored care, which means lower reimbursements, if any. "There is pressure on healthcare utilization, which could hurt them, but a lot of that would be offset by the margins gained from lower wage pressures," Bachman says.

While there is still plenty to be anxious about, the overall trends of the last few months are clearly showing that the worst of the recession is over for hospitals. That doesn't necessarily mean it's time to dust off the blueprints for the new atrium, or to announce healthy bonuses for the C-suite. But, hospital professionals should take some satisfaction in knowing that—for the most part—they've withstood heavy and unforeseen financial hits, dealt responsibly, compassionately, and intelligently with the worst recession in 70-plus years, and now appear positioned for a healthier future.