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Is My Hospital Going Broke?
I was visiting with a friend the other day who said “60% of hospitals in this country are losing money.” I decided to see if I could find some of the data underlying his statement. Without a lot of searching, I was able to find a diversity of viewpoints on what that simple statement actually means. Let me start with a report by Kaufman Hall called “The Essential Role of Financial Reserves in Not-For-Profit Healthcare.”[1] This report was commissioned by the American Hospital Association, (AHA.) Figure 1 shows the median operating margin from February 2022 through January 2023, showing a negative margin (loss) averaging about 1%. “…Moody’s Investor Services median operating margins from 2017-2021 ranged between 2.1% and 2.9%...a 2018 study of a wider group of more than 2,800 hospitals found an average clinical operating margin of -2.7%.” Even without statistical analysis, these observations indicate a wide range in operating margins across hospitals. This point is also emphasized by looking at days cash on hand, a measure of liquidity scaled to institutional size. Figure 5 shows days cash on hand from January 2021 through September 2022 for the 25th, 50th, and 75th percentile of hospitals, all of whom experienced a reduction, but the values were 34 days, 147 days, and 216 days. The percentage reduction was higher at the 25th percentile (49%) compared to the 50th (28%) and 75th percentile, (29%). Clearly, the rich are a little worse off, but the poor are in trouble. Those with chronic negative operating margins must use income from cash reserves or be “eating the cow” by consuming the reserves to pay bills. Just to make matters worse, 2022 was not a good year for investment return. This point has also been contentious, as shown in the following: “Any potential financial relief for non-profit hospitals and health systems reporting major net losses in 2022 must take into account the outsize role negative investment returns had on their bottom lines, health economists wrote in a Health Affairs Forefront article.”[2] The study being reported estimated 85% of the reported losses were investment losses, not operating losses and much of the paper loss had already been recovered as markets improved. Further, they reported operating income actually increased 1%. The AHA has roundly criticized this article.[3] “A recently published article in Health Affairs on hospital finances and financial assistance uses a flawed, debunked methodology to justify preconceived conclusions about how hospitals manage their finances. Even the authors admit that they have not accounted for broader coverage trends that may directly affect how they have measured financial assistance, which is an irreconcilable limitation. As a result, this article is of no real value to policymakers and other stakeholders. Of note, this study was funded by Arnold Ventures, an organization that has a history of funding misleading and one-sided reports.” So even the experts can’t agree on how to measure the problem, but news reports show pending closure of rural hospitals, in particular, and reports of problems recruiting nurses[4] and keeping the ones currently employed[5] are frequent. And for-profit hospitals have pointed out for years that their not-for-profit competitors may actually be disincentivized to make a “profit,” also known as an operating margin. There is consensus, though, that availability of trained staff, particularly nurses, is a real problem for everyone. If cash flow is tight and operating margins are negative, what should be done? While the answers are varied, it seems to me two things seem paramount. First, how many beds can we support given realistic, affordable staffing levels? Yes, this means giving up the idea you can grow your way to prosperity, and may, in the case of failing, small rural hospitals, mean getting out of the inpatient business. But “right-sizing” also allows you to refocus on doing a good job of taking care of the patients you have staff to support, not providing in-patient care for everyone in your area. Second, how can we control costs so we can break even on the Medicare book of business? The pandemic showed everyone just how much operating margins depend on the elective, commercial business. But I don’t think this is a sustainable model. Said another way, hospitals are loss centers, not profit centers, so we need to address causes for excess hospital demand. Curiously, this is the mind-set needed to play the so-called value proposition. As hospitals individually work to adjust to changing financial conditions, society needs to address the growing disparity between rich institutions and poor ones. Like much else, we tend to reward those who have, as opposed to providing for those who haven’t. Is this really what we want for health care? Are we really happy with what the market-based system has given us? Is there some way to get the efficiency of market-based systems while rewarding meeting community need? Obviously, these are more questions than answers, but I am leery of glib answers to tough questions. Presently, many hospitals, particularly small rural ones, are on life-support, but many large organizations are doing quite well. So, the question “is my hospital going broke” can best be answered “maybe.” Certainly, changes are in order for those not yet in trouble to rethink their goals and avoid the risk. 14 July 2023 [1] Kaufman Hall. “The Essential Role of Financial Reserves in Not-For-Profit Healthcare.” April 2023. Accessed 12 July 2023 at https://kaufmanhall.com/insights/researchreport/essential-role-financial-reserves-not-profit-healthcare. [2] Muoio D. Taxpayers Shouldn’t Foot the Bill for Health Systems Massive 2022 Investment Losses, Health Economists Say. 24 March 2023. Accessed 11 July 2022 at https://www.fiercehealthcare.com/providers/taxpayers-shouldnt-have-subsidize-health-systems-massive-2022-investment-losses-health [3] Hatton M. What a Recent Health Affairs Piece Gets Wrong About Hospital Finances and Charity Care. 7 June 2023. Accessed 11 July 2022 at https://www.aha.org/news/blog/2023-06-07-what-recent-health-affairs-piece-gets-wrong-about-hospital-finances-and-charity-care. [4] Weill D. We Must Take Care of Our Nurses Who Take Care of US. They’re Fed Up with Conditions and Pay, and Shortage May Get Worse. USA Today, 26 October 2022. [5] Alltucker K. Survey: About One-third of Nurses Plan to Leave Job. Burnout, Retirement, Stress Cited Reasons. USA Today, 4 May 2023. |
Further Reading
Answering Strategic Questions Answering strategic questions is hard work and also uncertain, but these are not reasons to avoid asking them. Asking the Right Questions Solutions for problems in health care abound, but are we asking the right questions? Big Medicine Big medicine may be financially necessary, but it poses risks unless care is taken to become a real system, which requires putting the clinical enterprise at the center. Capitalism in Medicine Is capitalism, with its emphasis on markets, really the appropriate model for health care? More on Money in Healthcare Hospitals account for the largest fraction of the healthcare dollar, but are usually hegemonic if not monopolies in their communities. Can Trustees call them back to their mission of patient care? Staff Shortages When there is no room at the inn due to staff shortages, the standard of practice will have to change. We need to think about what this might mean. |