News Release | Financial Analysis 2006

Financial Analysis 2006 News Release

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

COMMERCIAL INSURANCE PAYMENTS TO HOSPITALS INCREASE AGAIN

Costs Shifting to Offset Medicare Underpayments Income Concentrated Among Smaller Number of Hospitals

Harrisburg, PA - June 27, 2007 - Commercial health insurers continued to provide a disproportionate amount of general acute care (GAC) hospital revenue in fiscal year 2006 (FY06), according to new figures released today by the Pennsylvania Health Care Cost Containment Council (PHC4). In FY06, nearly 52% - or $969 million - of the $1.866 billion increase in statewide net patient revenue (NPR) came from payments by commercial insurers. Operating income rose from $963 million in FY05 to $1.2 billion in FY06. Total net income rose from $1.3 billion in FY05 to $1.6 billion in FY06. The findings were released in PHC4’s latest hospital financial report titled Financial Analysis 2006-Volume One.

"The higher operating margins experienced by Pennsylvania hospitals have been driven primarily by reimbursements from commercial health insurers," said Marc P. Volavka, PHC4’s Executive Director. "Yet, this rise in income has not benefited all hospitals equally as 62% of statewide operating income in FY06 was earned by just ten GAC hospitals."

Operating income is primarily the difference between money spent on patient care and money received in payment for that care. Total net income, a hospital’s overall bottom line, includes operating income as well as earnings from investments in the stock market, the value of securities, endowments and charitable contributions.

Over the past decade, the distribution of hospital income has become more concentrated. Of the state’s 174 GAC hospitals, the ten hospitals with the highest total net income in FY06 generated 52% of statewide net income while providing 28% of the patient care. The average total margin for these ten hospitals was 10.01%, compared to the 5.51% statewide average. In FY96, the top ten money-making hospitals only comprised 44% of statewide total net income.

Eleven fewer GAC hospitals reported negative total margins during FY06 than in FY05. Despite this improvement, 38 GAC hospitals or 22% of the 174 reporting GAC hospitals lost money during FY06. This is an improvement from three years ago when 48% of GAC hospitals posted losses, two years ago when 34% lost money, and last year when 28% had negative total margins.

The portion of net patient revenue from commercial payors increased from 42.53% in FY05 to 43.17% in FY06, while Medicare decreased from 38.47% to 37.47% during the same period - despite the fact that Medicare patients are older, require more resources to treat and tend to have longer hospitalizations than patients in the commercially-insured population.

"The numbers suggest that Medicare continues to under-reimburse Pennsylvania hospitals, and that commercial payors are making up all or a part of those losses," noted Mr. Volavka. "These costs are ultimately borne by employers and labor unions that purchase health benefits, by consumers who pay out of pocket, and by hospitals with limited ability to shift them."

The number of hospitals that sustained average losses over the last three years dropped from 59 at the end of FY05 to 50 at the end of FY06. Similarly, the number of hospitals with three-year average total margins in the tenuous 0% to 2% range fell from 26 to 14. Offsetting this decline at the lower end of the scale, there were 15 more hospitals with three-year average total margins between 2% and 8%.

Unlike FY04 and FY05, the improvement in FY06 total margin resulted from a combination of a 26.7% ($257 million) increase in operating income and a 36.5% ($112 million) increase in non-operating income. In FY04, the improvement in total margin was driven primarily by gains in non-operating income from investments and contributions. In FY05, the growth in total margin was the result of an unprecedented increase in operating income.

On a statewide basis, GAC hospitals provided a total of $597 million in uncompensated care in FY06, up 9.7% from $544 million during FY05. Uncompensated care as a percent of net patient revenue also increased from 2.10% in FY05 to 2.15% in FY06.

Other highlights:

The statewide total margin realized by Pennsylvania’s 174 GAC hospitals grew by nearly a full percentage point, rising from 4.59% in FY05 to 5.51% in FY06. Operating margin rose from 3.52% in FY05 to 4.17% in FY06.
In FY06, Pennsylvania hospitals, on average, received 20.6% of their total annual NPR from their single largest commercial payor.
While operating expenses at Pennsylvania hospitals grew by 6.4% in FY06, reimbursements from all payors grew by 7.2%, with commercial insurance and Medicare reimbursements growing 8.8% and 4.4%, respectively.
In FY06, indemnity reimbursements for commercial and Medicare patients grew at a faster rate than managed care reimbursements. This reverses a four-year trend of managed care payments outpacing commercial and Medicare indemnity payments.

PHC4 is an independent state agency charged with addressing the cost and quality of health care in Pennsylvania. Copies of Financial Analysis 2006, Volume One are free and available online at http://www.phc4.org or by calling 717-232-6787.