Volume One News Release | Financial Analysis 2004

Financial Analysis 2004 News Release

FOR IMMEDIATE RELEASE

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

HOSPITAL FINANCIAL MARGINS UP - MEDICARE PAYMENTS LAG BEHIND

Harrisburg, PA - April 29, 2005 - The statewide total financial margin realized by Pennsylvania’s general acute care (GAC) hospitals grew by more than a full point in FY04, rising from 2.30% in FY03 to 3.37% in FY04, according to the latest hospital financial figures released today by the Pennsylvania Health Care Cost Containment Council (PHC4). This improvement was driven by large gains in non-operating income, which rose from $34 million in FY03 to $330 million in FY04. Increases in net patient revenue kept pace with operating expenses at 8% respectively statewide. Medicare revenue increased by only 4.1%, while substantial increases in revenue from Commercial health insurance plans (10.6%) and the state's Medical Assistance program (15.2%) made up the difference.

“The growth in Medicare revenue continued to lag far behind that of other third-party payors,” stated Marc P. Volavka, Executive Director of PHC4. “Commercial health plans have emerged as the single largest source of hospital net patient revenue, supplanting Medicare.”

The statewide operating margin fell slightly, from 2.16% in FY03 to 2.10% in FY04. However, the statewide total and operating margins in FY04 were appreciably affected by “merger, impairment and other unusual charges” posted by a single hospital system: Tenet Health Systems.

Although non-operating income caused the statewide total margin to rise in FY04, operating gains were primarily responsible for pulling many hospitals out of the red during FY04. Thirty-eight (38) hospitals produced positive total margins in FY04 after posting losses in FY03. Improvement in operating income was the primary factor that brought 26 of the 38 hospitals into the black during FY04. Conversely, operating income was the primary factor that caused ten of eleven hospitals to post losses in FY04 after being in the black in FY03.

“Fewer hospitals posted losses in FY04 than FY03,” stated Mr. Volavka. “However, one year of improved margins does not constitute a trend, and the continuing lag in Medicare reimbursements should send out red flags, but hopefully these gains will be sustained going forward.”

Managed care plans continued to drive the increases in patient revenue. Commercial managed care plans, together with managed care plans funded by Medicare and Medical Assistance, provided almost half of the statewide patient revenue during FY04. However, managed care plans were responsible for 70% of the increase in patient revenue during FY04.

The average revenue per discharge grew 11.9% for Commercial managed care plans, 9.4% for Medical Assistance managed care plans and 6.4% for Medicare managed care patients. In contrast, the overall statewide average revenue per discharge increased by 5.2%.

Other Highlights

34% (61 hospitals) reported losses in FY04 compared to 48% (88 hospitals) in FY03.
Overall, the average revenue per inpatient discharge grew 11.3% for commercial health insurance companies and 5.1% for Medical Assistance, while the average revenue per discharge from Medicare grew by only 1.2%.
Commercial health insurers provided 41.8% of statewide patient revenue during FY04, up about one percent from a year earlier.
Medicare’s share of statewide patient revenue fell to 39.0%, down from 40.5% during FY03.
The average total margin for eight of the nine regions improved during FY04. The largest increase was in Region 4 (North Central), with the total margin rising from 1.25% in FY03 to 6.56% in FY04. The average total margin fell nearly 1.8 points to 1.71% in Region 9 (Philadelphia).
If extraordinary depreciation adjustments for the Tenet Healthcare hospitals are excluded from the calculation of the regional total margin, Region 9 still fell by 1.8 points, but the FY04 total margin would have been 3.04% instead of 1.71%. Excluding the extraordinary adjustment by Tenet would also result in a decline in the Region 8 (Suburban Philadelphia) total margin from 2.31% in FY03 to 2.01% in FY04. With the Tenet adjustment Region 8's total margin increased from 1.39% to 1.98%.

The Pennsylvania Health Care Cost Containment Council 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 2004, 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.