Hospitals' Little Secret: They Make Lots of Money

By Slomski, Anita J. | Medical Economics, March 27, 1995 | Go to article overview
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Hospitals' Little Secret: They Make Lots of Money


Slomski, Anita J., Medical Economics


In 1993, the private,. non-profit Arkansas Valley Regional Medical Center in rural La Junta, Colo., posted net revenues of 16.6 percent, In the previous two years, the hospital--which doesn't get a cent from taxpayers--did even better, with nets of 19.9 and 17.9 percent. "When we disclosed our financial status, people in the community asked how we were able to build up these reserves. Some people figured we had to be overcharging them," says hospital CEO Jack Chubb.

On the contrary, he says, the hospital has bolstered its earnings by aggressively slashing expenses and by recruiting doctors to the community, which built market share. The hospital also owes its healthy balance sheet to the fact that a neighboring hospital closed, thereby eliminating all competitors for 60 miles.

Although Arkansas Valley's financial results are extraordinary, hospitals all across the country are sitting on cushy bottom lines. "The old 'poor me' isn't always there. Hospitals have a lot of cash," says health-care consultant Bill De Marco of Rockford, Ill. Between 1990 and 1993, hospitals' profit margins soared 45 percent. In 1992, they were the highest they'd been in six years. Margins dipped in 1993, but only by two-tenths of a percentage point. That same year, hospital closings fell to a 10-year low.

Hospitals' near-record profits are both good and bad news for doctors. Obviously, doctors want their own hospitals to remain solvent so they have a place to admit their patients. But physicians also fear that hospitals will use any excess cash to compete with them for managed-care contracts in the outpatient arena. The AMA is so concerned that hospitals and others with deep pockets will wrest control of medicine away from doctors that it is planning a new program to help physicians launch their own healthcare enterprises. The program--Physicians Capital Source--will help doctors write business plans and locate capital for ventures ranging from groups without walls to staff-model HMOs.

Hospitals, meanwhile, have kept a low profile regarding their profits. They may be spending small fortunes building huge integrated delivery systems, but many are also moaning because nearly 40 percent of their beds are empty, and they are threatening that miserly Medicare and Medicaid payments will bankrupt them. "Congress has historically made the Medicare program a sacrificial lamb for other budget concerns," says Greg Boattenhamer, vice president of communications for The Iowa Hospital Association. "Iowa hospitals depend on Medicare, and further large cuts could close some of our hospitals, We have no doubts about how devastating it could be."

But while Boattenhamer appears to have a legitimate concern, the public image that hospitals nationwide are one step away from insolvency doesn't jibe with the reality of their balance sheets. And what hospitals plan to do with their excess cash is every doctor's worry. At least half of all hospitals now employ doctors or are affiliated with group practices. The challenge for physicians is to remain in the driver's seat even though hospitals have the clout and the cash. So how much wealth do hospitals have, and how have they managed to acquire it during such lean times for health care? We looked into the financial data for answers.

Hospitals defend their bottom lines

According to the American Hospital Association's annual survey of more than 6,000 institutions, the profit margin for all hospitals was 4.4 percent in 1993--not earthshaking, but significantly better than the margins in such industries as retail stores (2.9 percent) and grocery stores (1.5 percent). For the first half of 1994--the most recent data available--hospital profit margins were 5.9 percent. "Four-plus percent is a nice bottom line," says Stephen Shortell, professor of health-service management at Northwestern University's J.L. Kellogg Graduate School of Management.

The majority of hospitals, however, were even stronger financially than the averages indicate.

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