Volume One News Release | Financial Analysis 2005

Financial Analysis 2005 News Release

FOR IMMEDIATE RELEASE

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

HOSPITAL INCOME CLIMBS; MEDICARE PAYMENTS LAG BEHIND OTHER PAYORS

Harrisburg, PA - April 28, 2006 - While operating expenses at Pennsylvania hospitals grew by 5.7% in Fiscal Year 2005, reimbursements from third-party payors grew by 7.4%, leading to a 90% gain in operating income over the previous year, according to new figures released today by the Pennsylvania Health Care Cost Containment Council (PHC4). Operating income rose from $506 million in FY04 to $981 million in FY05. Commercial health insurers accounted for 42.4% of reimbursements paid to hospitals in FY05, compared to 38.5% from Medicare and 10.6% from the state's Medical Assistance program. Commercial health insurance payments have replaced Medicare as the single largest source of hospital net patient revenue in recent years.

"While one year does not a trend make, this is the third straight year of positive financial growth for many Pennsylvania hospitals," stated Marc P. Volavka, Executive Director of PHC4. "Overall, reimbursements for patient care, which is the core business of hospitals, have increased significantly over the past fiscal year."

This was the sixth straight year that the growth in Medicare revenue lagged behind both commercial health plans and the state's Medical Assistance program. Medicare revenue increased by only 5.38%, while revenue from commercial health plans and Medical Assistance increased by 8.32% and 12.86%, respectively. With the increases in Medicare payments lagging behind other payor categories, the gap between total commercial and Medicare revenue has widened from about $675 million in FY04 to over $1.0 billion in FY05.

"Lagging reimbursements from the federal Medicare program remain a critical issue for Pennsylvania hospitals," noted Mr. Volavka. "A statewide comparison of revenue to a case mix index, which reflects hospital costs, suggests Medicare is under-reimbursing by about 16%, compared to the average for all payors."

Despite positive gains recently, 59 Pennsylvania hospitals have lost money overall (total margin), on average, over the past three years. Fifty-six of these hospitals are small to medium size community hospitals. Many of these hospitals cannot rely on a larger health system or for-profit corporation for financial support, and will find improvements in new technology, access to capital, recruitment of new staff, especially nurses and physician specialists, and the upgrading of old or obsolete equipment very challenging.

"Recent improvements in hospital margins are good news," said Mr. Volavka. "However, the fact that 27% still lost money in FY05 is troubling, particularly when so many of these hospitals are small, independent community hospitals, often in rural areas, that serve vital needs in those communities."

Other Highlights:

The statewide financial margin realized by Pennsylvania's 176 general acute care (GAC) hospitals grew by more than a full point in FY05, rising from 3.22% in FY04 to 4.62% in FY05.
Forty-seven (47) hospitals reported losses in FY05, compared to 61 in FY04.
By the end of FY05, 35 hospitals or one-fifth (20%) of all hospitals posted three-year average total margins of over 6%. This is an increase of 14 hospitals over FY04 when 21 or 12% of the hospitals were over 6%.
During FY05, statewide charges increased by 9.2%, compared to the 7.4% increase in total net patient revenue. On average, hospital charges now run 3.5 times greater than hospital revenue.
Ten of the 19 for-profit hospitals required to submit data to PHC4 had positive operating margins.
For the fourth consecutive year, managed care reimbursement rates continued to grow faster than indemnity reimbursements for commercial and Medicare patients.
The average revenue per discharge grew 10.28% for commercial managed care patients, 8.98% for Medicare managed care patients, and 4.01% for Medical Assistance managed care patients. In contrast, the overall statewide average revenue per discharge increased by 5.75%.

PHC4 is an independent state agency that collects, analyzes and publishes information about the cost and quality of health care in Pennsylvania. Copies of Financial Analysis 2005, Volume One are free and are available online at http://www.phc4.org or by calling 717-232-6787.