Hospital Profitability Down for 27 Percent of PA Facilities
In 2015, overall hospital profitability was on the decline for 27 percent of healthcare organizations in Pennsylvania.
- More than a quarter of acute care hospitals in Pennsylvania failed to achieve profitability in 2015, according to a recent report by the Pennsylvania HealthCare Cost Containment Council (PHC4). Twenty nine percent of the 170 hospitals in the state lost money on operations.
Forty-three of the hospitals with operating losses in 2015 or 88 percent, had annual net patient revenues below $150 million. Also, those that experienced negative operating margins did not have enough revenue from patient care and other sources of revenue to cover operating expenses, the report said.
In 2015, statewide inpatient revenue was $21.6 billion, which was a 4 percent increase from the previous year. Operating expenses, however, increased by $1.4 billion, or 3.7 percent. This may explain why there was a slight reduction in total various hospitals’ total profit margins.
The statewide operating margin increased 1.21 percentage points from 4.25 percent to 5.46 percent during 2015.
The statewide operating income for hospitals rose 34.7 percent from $1.7 billion in 2014 to $2.3 billion in 2015. The report also noted that medical centers as a whole experienced a drop in uncompensated care costs. Forty-nine percent of uncompensated care was categorized as bad debt during 2015, the report said.
"While the data shows many of the 170 Pennsylvania hospitals experienced positive operating and total margins in fiscal year 2015, and uncompensated care dropped 8.6 percent, there were forty-nine, or 29 percent, hospitals that lost money on operations and forty-six, or 27 percent, lost money overall," said Joe Martin, executive director of PHC4.
In Philadelphia alone, there were both winners and losers when it comes to profits for 2015. Thirteen hospitals operated at a profit, while seven experienced losses. The most profitable hospital was the Hospital of the University of Pennsylvania, which recorded a net income of $366.2 million.
Shriners Hospital for Children, however, had the largest net loss at $39.1 million. Hahnemann University Hospital also posted a significant loss at $29 million.
In the four surrounding suburban counties of Philadelphia, 17 hospitals reported profits, while nine posted deficits.
Losing money on operations surely was not what hospital executives had in mind for 2015. Hospitals need positive income levels, or total margin, to operate effectively. When they have a negative total margin, or deficit, they are not able to receive sufficient revenue to pay all of their expenses, the report said. Also, hospitals operating at a deficit are required to seek out other sources of revenue, such as “debt restructuring, charitable donations, or endowments”, or review their spending patterns to save on costs. Hospitals also need to earn “sufficient income” so they can improve their equipment and facilities.
“Such improvements are necessary to replace worn out or obsolete buildings and equipment, keep pace with changes in medical technology, and meet a community’s changing health care needs,” the report said.
Aside from using their own funds, hospitals also finance improvements to facilities and equipment by issuing bonds or entering into other debt financing, the report said. However, financial institutions and potential bondholders must be convinced that a hospital is able to repay its debt. Hospitals projected to have negative or low income tend to have a difficult time borrowing money.
“It is important to monitor hospital income levels closely because relatively small changes in revenues or expenses can make a large difference in the financial health of a hospital,” the report said.
The exact amount of income a hospital needs depends on a number of factors. For example, the condition of a hospital’s plant and equipment will determine how much income they need. The amount of debt and available assets for capital improvements are also factors that impact how much income a hospital needs. Other factors include: the mix of care that a hospital provides, levels of payment risks, and the needs of the specific market that the hospital serves.
“A high-quality, cost-effective healthcare delivery system requires financially healthy hospitals and health systems,” the report said. “A hospital with a history of continuous moderate income levels in all likelihood can maintain operations with a lower income level if it has kept pace with needed improvements and has not depleted its capital reserves or acquired debt in order to meet expenses.”
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