Chapter 4:Trends in Hospital

Financing

Trends in Hospital Financing

Chartbook 2000

Overall Financial Performance

The aggregate hospital total margin fell to 5.8 percent in 1998, as growth in expenses slightly outpaced growth in revenues. This increased the proportion of hospitals with negative total margins to 26.6 percent, representing the highest percentage of hospitals with negative margins since 1990 (Charts 4.1 - 4.3).

After increasing rapidly from 1994 to 1997, aggregate non-operating gains (e.g., income from investments) as a percentage of total net revenue for hospitals have leveled off in 1998. At 2.8 percent of revenue, non-operating gains make up about half of aggregate total margin (Chart 4.4).

Although 1999 AHA survey data are not yet available, other data sources indicate that financial performance is continuing to decline for both not-for-profit and for-profit hospitals. Operating margins for the first and second quarters of 1999 fornot-for-profit hospitals are down relative to the same quarters of 1998. Composite earnings per share projections for publicly traded hospital stocks fell by 23 percent from October 1998 to January 2000. Bond rating agencies reported a surge in bond downgrades for hospitals in 1999, with downgrades outnumbering upgrades by more than four to one in the first part of 1999. (Charts 4.5 - 4.7).

Payer Mix

Since 1980 hospital reliance on Medicare and Medicaid has increased. In 1980 Medicare represented 35 percent of total costs, growing to 39 percent by 1998. Over the same period, Medicaid increased from 10 percent to 13 percent. Meanwhile, private payers’ share of costs has decreased from 42 percent to 38 percent and uncompensated care has increased from five percent to six percent of total costs (Chart 4.8).

Chapter 4:Trends in Hospital

Financing

2

Trends in Hospital Financing

Chartbook 2000

Payer Performance

1998 marked the end of a 10 year upward trend in the aggregate Medicare payment-to-cost ratio. The ratio exceeded breakeven for the first time in 1996 and hit its highest point in 1997, before declining under pressures including the impact of the Balanced Budget Act of 1997 (BBA). Payment-to-cost ratios for Medicare and the private sector have generally trended in the opposite direction -- when Medicare payment-to-cost ratios have trended down, private sector ratios have trended up and vice versa. This pattern has helped to stabilize hospital margins. In 1998, however, both Medicare and private sector payment-to-cost ratios fell, contributing to the decline in total margins for hospitals noted earlier (Charts 4.9 - 4.10).

In 1999, the Medicare Balanced Budget Refinement Act (BBRA) returned approximately $8.4 billion in Medicare payments to hospitals over the five-year period from 2000 to 2004. However, the remaining impact of the BBA, after the BBRA, still reduces Medicare payments to hospitals by 10.9 percent from 1998 to 2004. Aggregate Medicare margins are projected to drop below breakeven by 1999. By 2004, six out of 10 hospitals are projected to lose money on Medicare (Charts 4.11 - 4.12).

3

Trends in Hospital Financing

Chartbook 2000

Chart 4.1:Annual Change in Hospital Operating Revenue and

Expensesper Adjusted Admission(1)

1981 - 1998

Source: The Lewin Group Analysis of the American Hospital Association Annual Survey data,1980 - 1998, for community hospitals

(1) An aggregate measure of workload reflecting the number of inpatient admissions, plus an estimate of the volume of outpatient services, expressed in units equivalent to an inpatient admission in terms of level of effort

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98

Change in Revenue

Change in Expenses

4

Trends in Hospital Financing

Chartbook 2000

Chart 4.2:Percent of Hospitals with Positive

or Negative Total Margins1980 - 1998

Chart 4.3:Aggregate Total Hospital Margins

1980 - 1998

0%

1%

2%

3%

4%

5%

6%

7%

8%

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98

Source: The Lewin Group Analysis of the American Hospital Association Annual Survey data,1980 - 1998, for community hospitals

Negative

Positive

80 81 82 98979695949392919089888786858483

0%

80%

60%

40%

20%

20%

40%

Source: The Lewin Group Analysis of the American Hospital Association Annual Survey data,1980 - 1998, for community hospitals

5

Trends in Hospital Financing

Chartbook 2000

6.7%6.2%

5.1% 5.3%

6.8%

4.4%

3.6%2.9%

5.7%

3.1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Source: HBS International, Inc., The Health of Our Nation’s Hospitals 1997 through Second Quarter 1999; based on 382 geographically distributed hospitals that are primarily non-profit facilities

(1) Operating margin is calculated as the difference between total operating revenue and total operating expense divided by total operating revenue; operating margins exclude non-operating revenues

1997 1998 1999

Chart 4.4:Income from Investments and Other Non-

operating Gains(1)

as a Percentage of Total Net Revenue1980 - 1998

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98

Source: The Lewin Group analysis of the American Hospital Association Annual Survey data, 1980 - 1998, for community hospitals

(1) Non-operating gains include income from non-operating activities, including investments, endowments and extraordinary gains, as well as the value of non-realized gains from investments

Chart 4.5:Non-profit Hospital Quarterly Operating Margins(1)

1997 - Second Quarter 1999

6

Trends in Hospital Financing

Chartbook 2000

Chart 4.6:Composite Fiscal Year 2000 Earnings

per Share Projections for Publicly Traded Hospitals

as Revised October 1998 - January 2000

$1.00

$1.10

$1.20

$1.30

$1.40

$1.50

$1.60

$1.70

Source: Composite calculated by The Lewin Group based on Wall Street consensus earnings per share projected for fiscal year 2000 for Columbia HCA Healthcare Corp.; Universal Health Services, Inc.; Quorum Health Group, Inc.; Health Management Associates, Inc.; and Tenet Health Care Corp.; data represents changes to fiscal year 2000 earnings expectations for publicly traded hospitals

Chart 4.7:Number of Bond Rating Upgrades and

Downgradesof Non-profit Hospitals

1993 - 1999

93 94 95 96 97 98 99

Source: Standard & Poor’s Credit Week Municipal, October 25, 1999; 1999 data through August 20, 1999

Downgrades

Upgrades34

19

63 6561

41

10

46

282826

55

32

73

October1998

October1999

July1999

April1999

January1999

January 2000

Date of Earnings Projection

7

Trends in Hospital Financing

Chartbook 2000

Medicare

Source: The Lewin Group Analysis of the American Hospital Association Annual Survey data, 1980 - 1998, for community hospitals

* Non-patient represents costs for cafeterias, parking lots, gift shops and other non-patient care operating services and are not attributed to any one payer

Other Government - 1%

Medicare - 39%

Medicaid - 13%

Uncompensated Care - 6%

Private Payer - 38%

Non-patient* - 3%

Chart 4.8:Distribution of Hospital Cost by Payer Type

1980 and 1998

70%

80%

90%

100%

110%

120%

130%

140%

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98

Medicaid

Private Payer

Chart 4.9:Aggregate Hospital Payment-to-cost Ratiosfor Private Payers, Medicare and Medicaid

1980-1998

Source: The Lewin Group analysis of American Hospital Association Annual Survey data, 1980 - 1998, for community hospitals

Other Government - 6%

Medicare - 35%

Medicaid - 9%

Uncompensated Care - 5%

Private Payer - 42%

Non-patient* - 3%

80 98

8

Trends in Hospital Financing

Chartbook 2000

-35%

-25%

-15%

-5%

5%

15%

25%

35%

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

Chart 4.10:Aggregate Margin by Payer

1980 - 1998 Actual1999 - 2004 Projected

Medicare with Costs at MB-1

ProjectedActual

Medicare

Private Payer

Total Margin

Medicare with Costs at MB

Medicaid

Source: The Lewin Group, “The Impact of the Medicare Balanced Budget Refinement Act on Medicare Payments to Hospitals,” February 1, 2000

Notes: (1) Uncompensated Care and Other Government Payers are not shown separately in this chart(2) Medicare projections based on The Lewin Group Analysis of Medicare payment policies under the Balanced Budget Act of 1997 and Medicare Balanced Budget Refinement Act of 1999(3) The market basket inflation rate is the rate of increase in the prices of goods and services purchased by hospitals:MB-1 = rate of increase in the prices of goods and services purchased by hospitals less onepercentage pointMB = rate of increase in the prices of goods and services purchased by hospitals

9

Trends in Hospital Financing

Chartbook 2000

Chart 4.11:Projected Total Medicare Payments to

HospitalsPre-BBA(1), Post BBA/BBRA (2) and Inflation-

adjusted1997 Actual

1998 - 2004 Projected

Source: The Lewin Group, “The Impact of the Medicare Balanced Budget Refinement Act on Medicare Payments to Hospitals,” February 1, 2000

*The 1999 AHA annual survey provides actual 1998 data; however, 1998 AHA data reflect Medicare payments made under payment policies before and after implementation of the BBA. Post-BBA margins reflect the actual costs reported in the 1999 AHA annual survey and post-BBA payments are simulated based on hospitals that reported payments that were fully subject to BBA policiesMB-1 = rate of increase in the prices of goods and services purchased by hospitals less one percentage point (about two percent each year)MB = rate of increase in the prices of goods and services purchased by hospitals (about three percent each year)

ProjectedActual

Chart 4.12: Hospital Total Medicare Margins

Actual and Projected Post-BBA/BBRA1996 - 1997 Actual

1998 - 2004 Projected

With Costs Growing at MB-1

With Costs Growing at MB

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

1996 1997 1998* 1999 2000 2001 2002 2003 2004

Source: The Lewin Group, “The Impact of the Medicare Balanced Budget Refinement Act on Medicare Payments to Hospitals,” February 1, 2000(1) Pre-BBA reflects projected payments under laws and regulations existing prior to passage of the BBA(2) Post-BBA/BBRA reflects projected payments under both the Balanced Budget Act of 1997 (BBA) and the Medicare Balanced Budget Refinement Act of 1999 (BBRA)

$115

$120

$125

$130

$135

$160

$155

$150

$140

$145Pre-BBA

Post-BBA/BBRA

Inflation-adjusted Post-BBA/BBRA

1997 1998 1999 2000 2001 2002 2003 2004Actual Projected

10

Trends in Hospital Financing

Chartbook 2000

Chart 4.13:Aggregate Payment-to-cost Ratios(1)

by Payer by State1998

Medicare MedicaidPrivatePayers

Nation 1.02 0.97 1.16Alabama* 1.07 0.91 1.12

Alaska* 0.83 0.76 1.40

Arizona* 1.06 0.95 1.12

Arkansas* 1.07 0.78 1.36

California* 1.06 0.94 1.26

Colorado 1.05 1.06 1.22

Connecticut 0.98 0.72 1.18

Delaware 0.95 0.82 1.26

Florida* 1.02 0.87 1.29

Georgia 1.04 0.99 1.29

Hawaii* 0.83 0.72 1.25

Idaho* 1.01 0.90 1.37

Illinois 0.94 0.71 1.22

Indiana 0.94 0.92 1.31

Iowa 0.89 0.92 1.32

Kansas 0.95 0.82 1.30

Kentucky* 1.02 0.93 1.19

Louisiana* 1.03 1.00 1.63

Maine 0.86 1.15 1.36

Maryland 1.11 1.09 1.12

Massachusetts 0.99 0.79 0.95

Michigan 0.99 0.96 1.11

Minnesota 0.90 0.92 1.20

Mississippi* 0.97 1.04 1.48

Missouri 0.97 0.90 1.15

Montana 0.92 0.81 1.36

Nebraska 0.91 0.98 1.32

Nevada* 0.97 0.97 1.30

New Hampshire 0.94 0.77 1.23

New Jersey* 0.96 0.97 1.11

New Mexico* 1.09 1.23 1.30

New York 1.03 0.98 1.01

North Carolina 1.01 0.93 1.30

North Dakota* 0.93 1.00 1.25

Ohio 0.96 0.92 1.18

Oklahoma 1.01 0.61 1.27

Oregon 0.99 0.83 1.13

Pennsylvania 1.01 0.77 1.03

Rhode Island 1.10 1.03 0.99

South Carolina 0.99 0.96 1.59

South Dakota 0.85 0.85 1.31

Tennessee* 1.12 0.74 1.30

Texas 1.01 1.09 1.27

Utah 0.99 1.05 1.19

Vermont 0.85 0.87 1.38

Virginia 1.02 1.01 1.30

Washington* 1.01 0.92 1.11

West Virginia 0.96 0.91 1.39

Wisconsin* 0.93 0.78 1.24

Wyoming 0.93 0.91 1.41

Source: The Lewin Group analysis of the American Hospital Association Annual Survey data, 1998, for community hospitals

(1) 1.00 reflects payment at 100% of cost* Less than 60% of hospitals reporting

11

Trends in Hospital Financing

Chartbook 2000

Chart 4.14:Aggregate Payer Margins and Hospital

Total Marginsby State

1998Medicare Medicaid

PrivatePayers Total(1)

Nation 1.8% -3.5% 13.6% 5.8%

Alabama* 6.2% -9.6% 10.6% 5.8%

Alaska* -20.2% -32.2% 28.4% 7.9%

Arizona* 5.8% -5.4% 11.0% 5.9%

Arkansas* 6.6% -28.4% 26.6% 6.4%

California* 5.3% -6.0% 20.8% 3.7%

Colorado 5.1% 5.4% 18.2% 8.9%

Connecticut -2.1% -39.7% 15.4% 3.9%

Delaware -5.5% -22.6% 20.6% 6.8%

Florida* 1.8% -14.9% 22.5% 6.2%

Georgia 3.9% -1.3% 22.6% 9.8%

Hawaii* -20.4% -38.4% 19.8% 0.5%

Idaho* 0.7% -11.5% 27.2% 14.0%

Illinois -6.4% -40.1% 17.9% 7.4%

Indiana -6.3% -9.0% 23.7% 9.3%

Iowa -12.5% -8.7% 24.2% 7.5%

Kansas -4.9% -21.7% 23.2% 9.1%

Kentucky* 1.5% -7.6% 16.2% 6.4%

Louisiana* 2.7% -0.2% 38.8% 5.8%

Maine -16.2% 12.9% 26.7% 8.3%

Maryland 9.5% 8.5% 11.0% 4.9%

Massachusetts -0.6% -26.3% -5.0% -0.3%

Michigan -0.7% -4.5% 9.9% 7.2%

Minnesota -10.6% -8.9% 16.4% 7.3%

Mississippi* -3.1% 4.1% 32.6% 7.2%

Missouri -2.9% -11.0% 13.3% 6.0%

Montana -8.3% -22.9% 26.3% 9.4%

Nebraska -9.5% -1.6% 24.2% 11.7%

Nevada* -2.6% -2.7% 22.9% 9.1%

New Hampshire -6.5% -29.5% 18.8% 6.6%

New Jersey* -3.7% -3.5% 10.0% -0.1%

New Mexico* 7.9% 18.6% 23.1% 10.3%

New York 2.5% -1.7% 0.7% 1.4%

North Carolina 1.3% -8.0% 23.1% 9.8%

North Dakota* -7.7% -0.2% 20.1% 8.3%

Ohio -4.2% -8.2% 15.1% 5.2%

Oklahoma 0.6% -64.5% 21.2% 2.9%

Oregon -1.0% -20.8% 11.8% 6.4%

Pennsylvania 0.8% -30.3% 3.2% 3.3%

Rhode Island 8.9% 2.9% -0.6% 5.0%

South Carolina -0.9% -4.5% 37.2% 7.8%

South Dakota -17.3% -17.5% 23.7% 6.1%

Tennessee* 10.9% -34.6% 23.1% 10.4%

Texas 1.1% 8.0% 21.4% 8.4%

Utah -0.8% 4.5% 15.6% 7.2%

Vermont -17.9% -15.4% 27.4% 3.8%

Virginia 1.7% 1.2% 23.3% 8.2%

Washington* 1.1% -8.5% 10.2% 5.3%

West Virginia -4.1% -10.1% 28.1% 5.6%

Wisconsin* -7.9% -27.5% 19.2% 6.9%

Wyoming -7.8% -9.6% 29.2% 12.2%

Source: The Lewin Group analysis of the American Hospital Association Annual Survey data, 1998, for community hospitals (1) Hospital total margins include non-operating revenue * Less than 60% of hospitals reporting

12

Trends in Hospital Financing

Chartbook 2000

Chart 4.15:Aggregate Cost by Payer

as a Percent of Total Expenses by State1998

Medicare MedicaidOther

GovernmentUncompensated

CarePrivatePayers

Non-patientCare(1)

Nation 39% 13% 2% 6% 38% 3%

Alabama* 43% 10% 2% 7% 36% 2%

Alaska* 24% 17% 8% 6% 42% 3%

Arizona* 35% 14% 1% 4% 42% 3%

Arkansas* 45% 12% 0% 9% 33% 2%

California* 30% 24% 6% 7% 31% 2%

Colorado 29% 10% 3% 8% 48% 3%

Connecticut 44% 12% 0% 3% 37% 4%

Delaware 36% 10% 0% 5% 40% 8%

Florida* 42% 10% 3% 8% 34% 2%

Georgia 38% 14% 1% 8% 37% 2%

Hawaii* 41% 14% 1% 3% 39% 2%

Idaho* 39% 10% 2% 4% 44% 2%

Illinois 38% 12% 0% 5% 42% 3%

Indiana 42% 8% 0% 5% 41% 3%

Iowa 45% 8% 1% 5% 38% 3%

Kansas 45% 8% 1% 4% 40% 2%

Kentucky* 43% 13% 0% 5% 36% 2%

Louisiana* 38% 16% 3% 14% 27% 2%

Maine 45% 11% 1% 5% 36% 2%

Maryland 40% 10% 0% 7% 40% 3%

Massachusetts 35% 8% 1% 5% 41% 9%

Michigan 39% 9% 0% 3% 46% 3%

Minnesota 35% 12% 1% 2% 47% 3%

Mississippi* 46% 13% 0% 9% 30% 2%

Missouri 44% 11% 0% 5% 38% 2%

Montana 44% 10% 4% 5% 34% 3%

Nebraska 42% 8% 1% 2% 44% 3%

Nevada* 39% 7% 3% 6% 44% 1%

New Hampshire 41% 7% 0% 5% 44% 2%

New Jersey* 44% 7% 0% 9% 37% 2%

New Mexico* 31% 15% 6% 14% 33% 2%

New York 36% 23% 1% 6% 30% 5%

North Carolina 43% 13% 1% 6% 35% 2%

North Dakota* 46% 9% 1% 2% 38% 3%

Ohio 41% 9% 1% 6% 40% 3%

Oklahoma 45% 9% 1% 7% 35% 3%

Oregon 37% 10% 1% 3% 46% 3%

Pennsylvania 44% 8% 0% 3% 43% 2%

Rhode Island 39% 11% 1% 4% 42% 4%

South Carolina 40% 17% 4% 0% 26% 2%

South Dakota 45% 8% 2% 2% 38% 4%

Tennessee* 40% 17% 2% 5% 34% 2%

Texas 37% 13% 2% 11% 34% 3%

Utah 28% 11% 2% 5% 51% 3%

Vermont 44% 13% 0% 4% 36% 2%

Virginia 39% 10% 2% 7% 40% 2%

Washington* 33% 15% 2% 3% 43% 3%

West Virginia 47% 14% 7% 5% 26% 1%

Wisconsin* 42% 8% 1% 3% 43% 3%

Wyoming 41% 10% 3% 6% 39% 2%

Source: The Lewin Group analysis of the American Hospital Association Annual Survey data, 1998, for community hospitalsNote: Totals may not not equal 100% due to roundingAggregate cost by payer as a percent of total expenses represents the portion of hospitals’ costs that are attributed to each payer category(1) Non-patient care costs represent hospitals’ other operating expenses such as cafeterias, parking lots and gift shops* Less than 60% of hospitals reporting 13