Hospital profit margins improving

A study shows that fewer institutions are in the red and that cash reserves are increasing.

By Victoria Stagg Elliott — Posted Sept. 10, 2009

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A healthier stock market, as well as layoffs and other cost cuts, pushed more hospitals into the black in the first quarter of this year, reversing a trend of declining profit margins, according to a recent report.

"Through a combination of aggressive cost controls and overall improvement in the economy, we're beginning to see a recovery," said Gary Pickens, PhD, lead author and chief research officer in Thomson Reuters' Center for Healthcare Improvement, which put out the report on Aug. 19.

The authors analyzed data on 522 U.S. hospitals. They found that the median profit margin grew from near zero in the third quarter of 2008 to 3.1% in the first quarter of this year. Large community hospitals made the most gains.

Hospitals usually run on very tight margins, and, as of 2009's first quarter, approximately 30% were operating at a loss. But this represented a decrease from the 50% that were in the red in 2008.

The amount of cash in hand also increased to about 90 days' worth. That number is important because it is often part of various bond or credit covenants. If the cash-on-hand number dips too low, a loan or other form of financing could be called in, which could jeopardize the institution's ability to operate.

Improvements in these financial indicators are believed primarily to come from positive movements in the stock market. A significant portion of hospital revenue comes from these investments.

But experts also say cost-control played a significant role. Hospital labor costs decreased by 3%, and other expenses went down 2%.

"Hospitals have been very careful to match expenses to revenues," Pickens said.

Expense reductions were achieved in part by increasing the number of jobs more slowly than in the past, allowing some positions to remain vacant and laying off some staff.

According to data the Bureau of Labor Statistics released Aug. 21, hospitals had 21 mass layoffs involving 1,716 people in July, represented an increase from the 13 incidents in June that lead to 1,429 employees losing their jobs. Mass layoffs are defined as affecting at least 50 people.

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