PHC4 | Financial Analysis 2007

Financial Analysis 2007 - News Release

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

PHC4 RELEASES LATEST HOSPITAL-SPECIFIC FINANCIAL PERFORMANCE NUMBERS

Harrisburg, PA - June 12, 2008 - While the overall financial health of Pennsylvania’s general acute care (GAC) hospitals improved in fiscal year 2007 (FY07), the amount of uncompensated care hospitals provided grew to $678 million in FY07, up 12.2% from $604 million during FY06. Uncompensated care as a percent of net patient revenue also increased from 2.17% in FY06 to 2.27% in FY07—the highest percentage since FY02. These findings were released today in PHC4’s latest hospital financial report titled Financial Analysis 2007-Volume One.

“The financial health of Pennsylvania hospitals continues to improve,” said David H. Wilderman, Acting Executive Director for PHC4. “It is important to note, however, that 25% lost money overall. That number has not improved since 2006 and is composed mainly of small to medium sized hospitals, many of which serve rural communities.”

The statewide total margin realized by Pennsylvania’s 170 GAC hospitals grew by more than a full percentage point, rising from 5.39% in FY06 to 6.51% in FY07. The statewide average operating margin rose from 3.99% in FY06 to 4.82% in FY07.

Operating margin reflects what hospitals earn from patient care and related operations, such as medical education and office space. Total margin includes both operating and non-operating income. The primary components to non-operating income are investment gains, contributions and the net effect of taxes on for-profit hospitals.

Commercial health insurers continued to provide an increasingly larger share of GAC hospital revenue in FY07. While net patient revenue (NPR) from all payors grew an average of 6.9% during FY07, revenue from commercial payors rose 9.4%. The portion of NPR from commercial insurers increased from 43.2% in FY06 to 44.2% in FY07, while Medicare decreased from 37.5% to 37.1% during the same period.

Outpatient care played a greater role than inpatient care in the growth of revenue from commercial insurers. Outpatient care was responsible for 58.5% of the increase in commercial revenue from FY06 to FY07 due to an 11.2% increase in the average reimbursement per outpatient visit by commercial insurers. The number of outpatient visits by commercially insured patients in FY06 and FY07 remained about the same.

Forty-two (42) hospitals—or 25%—of the 170 reporting hospitals posted negative total margins in FY07. In FY06, there were also 41 hospitals (out of 175) that posted negative total margins. The number of hospitals with negative operating margins declined from 61 (34.8%) in FY06 to 52 (30.5%) in FY07.

However, nearly half (48.9%) or 23 of the 47 small community hospitals with annual NPR below $50 million had negative operating margins. Even after gains, contributions and other income is included, 20 of these 47 hospitals (42.6%) still lost money. This is troubling because most of these smallest hospitals are a vital resource for rural Pennsylvania communities.

Other highlights:

Similar to FY06, the improvement in FY07 total margin resulted from improvements in both operating income and non-operating income. Nearly three-fourths (73%) of the $468 million increase in statewide total margin was the result of a $341 million growth in operating income. The other one-fourth (27%) was the result of a $127 million growth in non-operating income.
The number of hospitals that sustained average losses over the last three years dropped from 51 at the end of FY06 to 41 at the end of FY07. However, the number of hospitals with three-year average total margins in the tenuous 0% to 2% range grew from 14 to 29. At the other end of the spectrum, the number of hospitals with three-year average total margins over 8% grew from 16 to 28.
In FY07, Pennsylvania hospitals, on average, received 20.9% of their total annual NPR from their single largest commercial payor. This may be a factor when hospitals negotiate reimbursement rates with insurers.
Consistent with the national trend of rapidly growing enrollment in Medicare managed care plans, there was a 20.7% increase in discharges by Medicare managed care patients in Pennsylvania during FY07 alone. Yet, despite the sharp increase in Medicare managed care patients, about 70% of Medicare discharges during FY07 were still covered by the Medicare indemnity program.

PHC4 is an independent state agency charged with addressing the cost and quality of health care in Pennsylvania. Copies of Financial Analysis 2007, Volume One are free and available online at http://www.phc4.org or by calling 717-232-6787.