News Release - General Acute Care Facilities Volume One

FOR IMMEDIATE RELEASE

Contact: Joe Martin, Communications Director
717-232-6787 or

HOSPITAL MARGINS DECLINE AS NON-OPERATING INCOME FALLS; RURAL, SUBURBAN REGIONS HARDEST HIT

Harrisburg, PA - April 30, 2003 - Forty one percent of Pennsylvania’s general acute care (GAC) hospitals lost money in Fiscal Year (FY) 2002, according to a new report released today by the Pennsylvania Health Care Cost Containment Council (PHC4). Statewide average total margin or “net income” declined more than a full point in FY02, falling from 3.29% in FY01 to 2.26% in FY02. The decline was driven primarily by a sharp drop in non-operating income, which fell from $264.8 million in FY01 to $46.5 million in FY02 - an 82% decline. Rural and suburban regions generally had lower total margins, on average, than Philadelphia and Pittsburgh. Fiscal Year 2002 covers the period from July 1, 2001 to June 30, 2002.

“Most hospitals rely on non-operating income such as investments, trust income and contributions as an essential source of funding,” stated Marc P. Volavka, PHC4’s Executive Director. “With the economic downturn, hospitals suffered a significant decline in non-operating income, which greatly affected overall bottom lines.”

The statewide average total margin of 2.26% for Pennsylvania’s GAC hospitals was also approximately 2.4 points below the national average margin of 4.7% in FY02. Although Pennsylvania’s statewide average total margin has historically been below the national average, the national average margin increased by 0.2 points from 4.5% in FY01 while Pennsylvania’s margin fell.

According to hospital industry statements, hospital expenses have increased of late due to spikes in staffing costs, malpractice premiums, drugs, and medical equipment, and expenses did increase in FY02 by 7.38%. However, revenue increased by 7.43% during the same period, leaving the overall operating margin nearly the same in FY02 (2.05%) as in FY01 (2.00%).

Also noteworthy is that while more hospitals posted losses for FY02, the percentage of hospitals that sustained average losses over the past three years remained relatively constant. At the end of FY02, 35% of GAC hospitals had negative 3-year average total margins compared to 37% for the 3-year period ending in FY01. The relative stability in the distribution of the 3-year average total margins is to some extent a reflection of the fact that the overall hospital income in FY02 was still better than it was during FY99.

In regards to uncompensated care, which is a combination of bad debt and charity care, the dollar amount grew 12.91%, from $867 million in FY01 to $979 million during FY02. However, since statewide patient revenue also grew by nearly 8% during the year, the growth in the portion of care that GAC hospitals provided without reimbursement actually experienced a more modest growth to 4.84% in FY02 - up from 4.62% in FY01.

The 5.1% increase in statewide net patient revenue (NPR) received from Medicare during FY02 was less than half of the 12.1% increase in NPR from commercial payors and the 11.1% increase from Medical Assistance. Part of the reason for the smaller growth in Medicare revenue was that the average 7.7% growth in Medicare inpatient reimbursements per day was below the 10.6% increase for commercial insurers and 9.5% increase for Medical Assistance.

“Medicare payments continue to be problematic for hospitals,” noted Mr. Volavka. “While Medicare revenue grew for hospitals in 2002, it lagged behind payments for Medical Assistance patients, as well as payments from commercial insurance companies.”

The Pennsylvania Health Care Cost Containment Council (PHC4) is an independent state agency charged with collecting, analyzing and reporting information that can be used to improve the quality and restrain the cost of health care in Pennsylvania. Copies of Financial Analysis 2002, Volume One are free and are available on the Council’s website at http://www.phc4.org or by calling PHC4 at (717) 232-6787.