Why Hospitals Are Suddenly in The Doghouse

U.S. hospitals posted record profits of 6.9 percent in 2007, continuing a trend that extends back to 2004. In aggregate, the 4,897 community hospitals took in $43 billion more in revenue than they paid out in expenses. So why are they in such bad economic shape today that Moody’s recently lowered its outlook on hospitals to “negative”?

First, it’s important to remember that nearly a third of U.S. hospitals lost money on operations even in 2007, when the economy was still rolling along at a good clip. In areas where there are a lot of poor and uninsured patients, many hospitals have closed in the past few years. For example, 18 acute-care hospitals in New Jersey have shut their doors since 2000, and half of the state’s hospitals lost money last year.

Second, the hospital systems that did well in previous years invested heavily in the stock market and in the same toxic securities that have hurt many other institutions. For example, Chicago’s Advocate Health Care reported $108.8 million in investment losses for the first six months of 2008; Minnesota’s Allina system lost $10.4 million on its investments in the same period; and Catholic Healthcare West saw its investment income drop to $9.9 million for the fiscal year that ended in June 2008 from $591.6 million for the prior year.

This precipitous decline in investment income affects not-for-profit hospitals — the vast majority of U.S. institutions — far more than it does for-profit hospital chains. Because they’re unable to raise money on the public markets, not-for-profits rely on investment income to supply funds for capital projects and to cover shortfalls in operations. In better times, they could borrow money to make up the difference, but tighter credit has largely closed that spigot.

To make matters worse, hospitals across the country are starting to see fewer patients as people put off elective procedures. Fewer admissions mean fewer prescriptions and tests done at hospitals, and the downturn in physician practice business also means that fewer tests are being ordered from hospital labs.

Meanwhile, patients now bear a greater share of financial responsibility for their care because employers have changed their benefit designs to deal with soaring costs. High-deductible plans are on the increase, and the number of people considered underinsured has jumped 60 percent in the past five years. Hospitals often find it more difficult to collect from patients than from insurance companies, so their bad debt can be expected to rise.

The cost of uncompensated care as a percentage of hospital expenses (PDF link) — 5.8 percent in 2007 — has stayed fairly level for the past several years. And in 2007, the difference between Medicaid payments to hospitals and the cost of providing care (PDF) actually fell to $10.4 billion from $11.3 billion the previous year. However, states are staggering under the burden of soaring Medicaid costs as their tax revenues drop, and the federal government recently reduced what it pays for hospital outpatient care. So, unless the Obama administration antes up more for Medicaid, overall Medicaid payments to hospitals will fall, and the amount of uncompensated care will increase.