Chapter 4: Trends in Hospital Financing

Trends in Hospital Financing Chartbook 2003 According to the AHA Annual Survey, approximately 29 percent of hospitals had negative total margins in 2001, up from 19 percent in Overall, total hospital margins fell to 4.2 percent in 2001, down from 4.6 percent in 1999 and (Chart 4.1 – 4.2). Hospital outpatient revenue remained at 35 percent of total hospital revenue in 2001, up from 13 percent in Hospital operating revenue per adjusted admission increased 5.4 percent between 2000 and 2001, and hospital expenses per adjusted admission also continued to climb – 4.7 percent between 2000 and Since 1980, hospital dependence on Medicare has increased from 35 percent of total costs to almost 39 percent of total costs in Over the same period, Medicaid costs increased from 10 percent to nearly 13 percent of total costs. At the same time, private payers share of costs decreased from 42 percent to 39 percent. Medicare payments continued to fall relative to costs, while Medicaid payments relative to costs rose slightly. In 2001, Medicare paid about one-and-a-half percent below the cost of providing care, while Medicaid, in the aggregate, paid about 4 percent less. Private payers continued to pay more than the cost of providing care, helping some hospitals to compensate for losses from public payers and uncompensated care (Chart 4.4 – 4.7). As the U.S. economy continued to weaken, aggregate non-operating gains as a percentage of total net revenue dropped a point to 1.6 percent in 2001, but an increase in aggregate operating margins provided a slight offset to this decline. That same year, Standard & Poors downgraded more non-profit hospitals than it upgraded by a factor of 4, much higher than the previous three years. Reflecting upward pressure on labor costs from the workforce shortage, the percent change in the employment cost index for hospitals in 2002 was 4.9 percent, compared to 3.8 percent for all health services and 2.7 percent for all private service industries (Chart 4.8 – 4.11). Chapter 4: Trends in Hospital Financing 44

Trends in Hospital Financing Chartbook Chart 4.1: Percentage of Hospitals with Negative Total Margins Source: The Lewin Group Analysis of the American Hospital Association Annual Survey data, , for community hospitals Chart 4.2: Aggregate Total Hospital Margins (1), Operating Margins (2), and Patient Margins (3) Source: The Lewin Group Analysis of the American Hospital Association Annual Survey data, , for community hospitals (1) Total Hospital Margin is calculated as the difference between total net revenue and total expenses divided by total net revenue (2) Operating Margin is calculated as the difference between operating revenue and total expenses divided by operating revenue (3) Patient Margin is calculated as the difference between net patient revenue and total expenses divided by net patient revenue -6% -4% -2% 0% 2% 4% 6% 8% Total Margin Operating Margin Patient Margin

Trends in Hospital Financing Chartbook Chart 4.4: Distribution of Outpatient vs. Inpatient Revenues Source: The Lewin Group analysis of American Hospital Association Annual Survey data, 1980 – 2001, for community hospitals Gross Inpatient Revenue Gross Outpatient Revenue Source: DATABANK data. (1) Data represent the experience of 800 hospitals that consistently reported to DATABANK in 2001 and Data are unweighted and over represent smaller hospitals in western, rural states. A subset of states are not represented in DATABANK. DATABANK is an online database of hospital utilization and financial performance indicators. Chart 4.3: Hospital Margins Reported to DATABANK (1)

Trends in Hospital Financing Chartbook Chart 4.5: Annual Change in Hospital Operating Revenue and Expenses per Adjusted Admission (1) Source: The Lewin Group Analysis of the American Hospital Association Annual Survey data, , for community hospitals (1) An aggregate measure of workload reflecting the number of inpatient admissions, plus an estimate of the volume of outpatient services, expressed in units equivalent to an inpatient admission in terms of level of effort Change in Operating Revenue Change in Total Expenses Uncompensated Care (2) -5.6 % Other Government - 6.1% Uncompensated Care (2) - 5.1% Private Payer % Medicare % Medicaid - 9.6% Non-patient (1) - 2.7% Non-patient (1) – 2.8 % Private Payer – 38.6 % Other Government – 1.5 % Medicaid % Medicare – 38.6 % Chart 4.6: Distribution of Hospital Cost by Payer Type 1980, 2000, and 2001 Source: The Lewin Group Analysis of the American Hospital Association Annual Survey data, 1980, 2000, and 2001, for community hospitals (1) Non-patient represents costs for cafeterias, parking lots, gift shops and other non-patient care operating services and are not attributed to any one payer (2) Uncompensated care represents bad debt expense, at cost, and charity care 38.3% 12.8% 1.4% 38.7% 6.0% 2.8%

Trends in Hospital Financing Chartbook Chart 4.7: Aggregate Hospital Payment-to-Cost Ratios for Private Payers, Medicare and Medicaid Source: The Lewin Group analysis of American Hospital Association Annual Survey data, 1980 – 2001, for community hospitals (1) Includes Medicaid Disproportionate Share payments Private Payer Medicare Medicaid (1) Chart 4.8: Income from Investments and Other Non-operating Gains (1) as a Percentage of Total Net Revenue Source: The Lewin Group analysis of the American Hospital Association Annual Survey data, , for community hospitals (1) Non-operating gains include income from non-operating activities, including investments, endowments and extraordinary gains, as well as the value of non-realized gains from investments

Trends in Hospital Financing Chartbook Downgrades Upgrades Chart 4.9: Number of Bond Rating Upgrades and Downgrades of Non-profit Hospitals Source: Standard & Poors, 2003 Chart 4.10: Median Average Age of Plant Source: CHIPS: The 1994 Almanac of Hospital Financial & Operating Indicators and The Almanac of Hospital Financial & Operating Indicators and The 2001 Almanac of Hospital Financial & Operating Indicators. Ingenix: The 2003 Almanac of Hospital and Operating Indicators

Trends in Hospital Financing Chartbook Chart 4.11: Percent Change in Employment Cost Index (1), All Private Service Industries, All Health Services, and Hospitals, 12 Months Ending December 2002 Source: Bureau of Labor Statistics, data released January 30, 2003 (1) Total compensation