Research and analysis by Avalere Health Impact of the Economic Downturn on Hospitals FINAL January 14, 2009.

Research and analysis by Avalere Health

Impact of the Economic Downturn on Hospitals

FINALJanuary 14, 2009


3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

% U

ne

mp

loy

me

nt

Chart 1: Unemployment Rate (Non-farm), 2007-2008

Source: Department of Labor, Bureau of Labor Statistics, Labor Force Statistics. (2008). Access at: http://www.bls.gov/oco/cg/cgs035.htm.

Unemployment has grown markedly over the past year.

44% increase


As individuals lose employer-sponsored insurance, pressures on Medicaid increase.

57%

58%

59%

60%

61%

62%

63%

64%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% o

f P

op

ula

tio

n w

ith

ES

I

6%

7%

8%

9%

10%

11%

12%

13%

14%

% o

f P

op

ula

tio

n w

ith

Med

icai

d

ESI Medicaid

Source: Current Population Survey, U.S. Census Bureau. (2008). Access at: http://www.bls.gov/oco/cg/cgs035.htm; and Fronstin, P. (November 2005). Sources of Health Insurance Characteristics of the Uninsured: Analysis of the March 2005 Current Population Survey. EBRI Issue Brief, No. 287.

Chart 2: Percent of Population with Employer-sponsored Insurance (ESI) and Medicaid


Many states face budget shortfalls…

No Budget Gap

FY09 and/or FY10 Budget Gap

Chart 3: States with Budget Gaps in FY 2009 or Projected for FY 2010, as of December 23, 2008

Source: McNichol, E., and Lav, I.J. (23 December 2008). State Budget Troubles Worsen. Washington, DC: Center on Budget Policy and Priorities.


…and Medicaid – comprising nearly a quarter of state spending – is a target for budget cuts.

Chart 4: Percent of State Spending by Function, FY 2007

Source: National Governors Association and National Association of State Budget Officers. (June 2008). The Fiscal Survey of States. Washington, DC.

Total Spending: $1.46 Trillion

All Other, 40% Medicaid, 21%

Higher Education, 10%

Transportation, 8% Elementary & Secondary

Education, 21%


The credit crunch is affecting hospitals in multiple ways.

Chart 5: Percent of Hospitals Reporting Various Effects of Credit Crisis, November 2008

Source: AHA. (November 2008). Rapid Response Survey, The Economic Crisis: Impact on Hospitals.

4%

7%

10%

11%

11%

12%

33%

Inability to Withdraw Funds Held by FinancialInstitutions

Acceleration of Debt

Inability to Rollover or Renew Credit

Difficulty Refinancing Auction Rate Debt

Inability to Issue Bonds

Increased Collateral Requirements

Increased Interest Expense for Variable Rate Bonds

Ty

pe

of

Imp

ac

t


More than half of hospitals are reconsidering or postponing investments in facilities and equipment.

Chart 6: Percent of Hospitals Reconsidering or Postponing Capital Expenditures, November 2008

39%

45%

56%

Information Technology

ClinicalTechnology/Equipment

NewCapacity/Renovations

Ty

pe

of

Ex

pe

nd

itu

re



More than half of hospitals’ revenue comes from Medicare and Medicaid…

Medicaid, 14.8% Other Government, 1.5%

Medicare, 41.0%

Private, 42.7%

Chart 7: Percent of Gross Revenue by Payer, 2007

Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2007, for community hospitals.


…yet Medicaid and Medicare payments to hospitals already fail to cover costs.

-$35

-$30

-$25

-$20

-$15

-$10

-$5

$0

$5

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Bil

lio

ns

Medicare Medicaid

Chart 8: Hospital Payment Shortfall Relative to Costs for Medicare and Medicaid, 1997 – 2007

Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2007, for community hospitals.


During economic downturns, the need for financial assistance and subsidized services swells.

Chart 9: Percent of Hospitals Reporting a Moderate to Significant Increase in Uncompensated Care and Need for Subsidized Services in Past Three Months, November 2008


27%

31%

10%

20%

Community Needs forSubsidzed Services

Uncompensated Careas a Percent of Total

Revenues

Moderate Increase Significant Increase


The downturn is beginning to impact the financial health of hospitals.

Chart 10: Total, Operating and Patient Margins*, 3rd Quarter 2007 vs. 3rd Quarter 2008

Source: DATABANK, 557 hospitals reporting data for both 3rd Quarter 2007 and 3rd Quarter 2008 as of November 11, 2008.* Total Hospital Margin is calculated as the difference between total net revenue and total expenses divided by total net revenue. Operating Margin is calculated as the difference between operating revenue and total expenses divided by operating revenue. Patient Margin is calculated as the difference between net patient revenue and total expenses divided by net patient revenue.

-0.5%

3.9%

6.1%

-1.4%

2.9%

-1.6%

3Q 2007 3Q 2008

Patient Margin

Operating Margin

Total Margin


Chart 11: Percent Change in Employment, Seasonally Adjusted: Hospital vs. All Industries (Total Non-farm), 2006 – 2008

Source: Department of Labor, Bureau of Labor Statistics. (2008). Link: http://www.bls.gov/bls/employment.htm.*2008 Qtr 4 data are preliminary.

0.4%

0.7%0.7%0.8%

0.7%

0.5%

0.8%

0.6%

0.4%0.5%

0.7%

0.4% 0.4%

0.2%

-0.1%-0.2% -0.2%

-0.4%

-1.1%

0.3% 0.3%0.3%

0.6%

0.4%

-1.2%

-0.8%

-0.4%

0.0%

0.4%

0.8%

1.2%

Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4*

Qua

rter

ly (

3-M

onth

) P

erce

nt C

hang

e

Hospitals All Industries (Total Non-farm)

2006 20082007

Nationwide, hospital jobs are still growing even as employment in other industries declines.


Even so, many hospitals are making or considering cutbacks as economic concerns mount.

Chart 12: Percent of Hospitals Making or Considering Changes in Response to Economic Concerns, November 2008

21%

8%

12%

27%

53%

59%

Other

Considering Merger

Divesting Assets

Reducing Services

Reducing Staff

Cutting AdministrativeCosts


Research and analysis by Avalere Health Impact of the Economic Downturn on Hospitals FINAL January 14, 2009.

Documents

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avalere health impact

financial health of

community hospitals

hospitals final

half of hospitals revenue

medicaid chart