Chapter 4: Trends in Hospital Financing. Trends in Hospital Financing Chartbook 2003 According to the AHA Annual Survey, approximately 29 percent of hospitals.

Chapter 4:Trends in Hospital

Financing

Trends in Hospital Financing

Chartbook 2003

According to the AHA Annual Survey, approximately 29 percent of hospitals had negative total margins in 2001, up from 19 percent in 1996. Overall, total hospital margins fell to 4.2 percent in 2001, down from 4.6 percent in 1999 and 2000. (Chart 4.1 – 4.2).

Hospital outpatient revenue remained at 35 percent of total hospital revenue in 2001, up from 13 percent in 1980. Hospital operating revenue per adjusted admission increased 5.4 percent between 2000 and 2001, and hospital expenses per adjusted admission also continued to climb – 4.7 percent between 2000 and 2001. Since 1980, hospital dependence on Medicare has increased from 35 percent of total costs to almost 39 percent of total costs in 2001. Over the same period, Medicaid costs increased from 10 percent to nearly 13 percent of total costs. At the same time, private payers’ share of costs decreased from 42 percent to 39 percent.

Medicare payments continued to fall relative to costs, while Medicaid payments relative to costs rose slightly. In 2001, Medicare paid about one-and-a-half percent below the cost of providing care, while Medicaid, in the aggregate, paid about 4 percent less. Private payers continued to pay more than the cost of providing care, helping some hospitals to compensate for losses from public payers and uncompensated care (Chart 4.4 – 4.7).

As the U.S. economy continued to weaken, aggregate non-operating gains as a percentage of total net revenue dropped a point to 1.6 percent in 2001, but an increase in aggregate operating margins provided a slight offset to this decline. That same year, Standard & Poor’s downgraded more non-profit hospitals than it upgraded by a factor of 4, much higher than the previous three years. Reflecting upward pressure on labor costs from the workforce shortage, the percent change in the employment cost index for hospitals in 2002 was 4.9 percent, compared to 3.8 percent for all health services and 2.7 percent for all private service industries (Chart 4.8 – 4.11).

Chapter 4:Trends in Hospital

Financing

44

Trends in Hospital Financing

Chartbook 2003 45

0%

5%

10%

15%

20%

25%

30%

35%

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01

Chart 4.1:Percentage of Hospitals with Negative

Total Margins1980 - 2001

Source: The Lewin Group Analysis of the American Hospital Association Annual Survey data, 1980 - 2001, for community hospitals

Chart 4.2:Aggregate Total Hospital Margins(1),

Operating Margins(2), and Patient Margins(3)

1990 - 2001

Source: The Lewin Group Analysis of the American Hospital Association Annual Survey data, 1990 - 2001, for community hospitals

(1) Total Hospital Margin is calculated as the difference between total net revenue and total expenses divided by total net revenue(2) Operating Margin is calculated as the difference between operating revenue and total expenses divided by operating revenue(3) Patient Margin is calculated as the difference between net patient revenue and total expenses divided by net patient revenue

-6%

-4%

-2%

0%

2%

4%

6%

8%

90 91 92 93 94 95 96 97 98 99 00 01

Total Margin

Operating Margin

Patient Margin

Trends in Hospital Financing

Chartbook 2003

3.7%

2.3%

-2.3%-1.8%

2.9%

4.8%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

Total Margin Operating Margin Patient Margin

46

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01

Chart 4.4:Distribution of Outpatient vs. Inpatient

Revenues1980 - 2001

Source: The Lewin Group analysis of American Hospital Association Annual Survey data, 1980 – 2001, for community hospitals

GrossInpatientRevenue

GrossOutpatientRevenue

Source: DATABANK data.

(1) Data represent the experience of 800 hospitals that consistently reported to DATABANK in 2001 and 2002. Data are unweighted and over represent smaller hospitals in western, rural states. A subset of states are not represented in DATABANK. DATABANK is an online database of hospital utilization and financial performance indicators.

Chart 4.3:Hospital Margins Reported to DATABANK(1)

2001 - 2002

2001 2002

Trends in Hospital Financing

Chartbook 2003 47

Chart 4.5:Annual Change in Hospital Operating Revenue and

Expenses per Adjusted Admission(1)

1981 - 2001

Source: The Lewin Group Analysis of the American Hospital Association Annual Survey data,1981 - 2001, for community hospitals

(1) An aggregate measure of workload reflecting the number of inpatient admissions, plus an estimate of the volume of outpatient services, expressed in units equivalent to an inpatient admission in terms of level of effort

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01

Change in Operating Revenue

Change in Total Expenses

Uncompensated Care(2) -5.6 %

1980 2000 2001

Other Government - 6.1%

Uncompensated Care(2) - 5.1%

Private Payer - 41.8%

Medicare - 34.6%

Medicaid - 9.6%

Non-patient(1) - 2.7%

Non-patient(1) – 2.8 %

Private Payer – 38.6 %

Other Government – 1.5 %Medicaid -12.8 %

Medicare – 38.6 %

Chart 4.6:Distribution of Hospital Cost by Payer Type

1980, 2000, and 2001

Source: The Lewin Group Analysis of the American Hospital Association Annual Survey data, 1980, 2000, and 2001, for community hospitals

(1) Non-patient represents costs for cafeterias, parking lots, gift shops and other non-patient care operating services and are not attributed to any one payer

(2) Uncompensated care represents bad debt expense, at cost, and charity care

38.3%

12.8%

1.4%

38.7%

6.0%2.8%

Trends in Hospital Financing

Chartbook 2003 48

70%

80%

90%

100%

110%

120%

130%

140%

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01

Chart 4.7:Aggregate Hospital Payment-to-Cost Ratiosfor Private Payers, Medicare and Medicaid

1980 - 2001

Source: The Lewin Group analysis of American Hospital Association Annual Survey data, 1980 – 2001, for community hospitals

(1) Includes Medicaid Disproportionate Share payments

Private Payer

Medicare

Medicaid(1)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01

Chart 4.8:Income from Investments and Other Non-

operating Gains(1)

as a Percentage of Total Net Revenue1980 - 2001

Source: The Lewin Group analysis of the American Hospital Association Annual Survey data, 1980 - 2001, for community hospitals

(1) Non-operating gains include income from non-operating activities, including investments, endowments and extraordinary gains, as well as the value of non-realized gains from investments

Trends in Hospital Financing

Chartbook 2003 49

35 3419

63 6961

41

12 12 10 11

48606262

282840

73

32

55

26

92 93 94 95 96 97 98 99 00 01 02

Downgrades

Upgrades

Chart 4.9:Number of Bond Rating Upgrades and

Downgradesof Non-profit Hospitals

1992 - 2002

Source: Standard & Poor’s, 2003

Chart 4.10:Median Average Age of Plant

1990 - 2001

7.9 8.0 8.2 8.4 8.6 8.8 8.9 9.2 9.3 9.3 9.5 9.6

0

2

4

6

8

10

12

90 91 92 93 94 95 96 97 98 99 00 01

Source: CHIPS: The 1994 Almanac of Hospital Financial & Operating Indicators and The 1996-7 Almanac of Hospital Financial & Operating Indicators and The 2001 Almanac of Hospital Financial & Operating Indicators. Ingenix: The 2003 Almanac of Hospital and Operating Indicators

Trends in Hospital Financing

Chartbook 2003 50

2.7%

3.8%

4.9%

0%

1%

2%

3%

4%

5%

6%

All Private ServiceIndustries

All Health Services Hospitals

Chart 4.11:Percent Change in Employment Cost Index(1),

All Private Service Industries, All Health Services, and Hospitals,

12 Months Ending December 2002

Source: Bureau of Labor Statistics, data released January 30, 2003

(1) Total compensation