Hospital Credit Quality is Feeling Better These Days
In an industry that is highly dependent on third parties; such as governmental bodies and health insurance companies that either determine or have powerful bargaining control over prices, hospital financial quality is frequently called into question. Following the challenging years, which opened this century, most hospitals appear to have made it through 2004 in fairly good financial position. With about 75% of the 1100 plus hospitals in Merritt Research Services LLC (Cedar Rapids, IA) database reporting their 2004 audited financials, operating and profit margins, liquidity, and debt service coverage are in their best shape since 1998. That’s the year that the federal government implemented its cost cutting Balanced Budget Act. By 2002, more efficient management, as well as gradual rates hikes garnered from the health insurers in the context of an improving economy, gradually helped stabilize credit erosion. Then, in 2003 with the help of the Medicare Modernization Act, hospitals were nourished back to financial health that was certainly evidenced in 2004. Nevertheless, the numbers tracked by Merritt Research show some interesting additional statistical trends that are worth noting and watching for developments. The good side ranges from rising occupancy to faster receivable collection. Challenges of higher indebtedness, growing staffing, aging plant facilities and increasing charity care as well as bad debts are also noted.
Nearly all financial measures relative to 2004 results reported by Merritt Research as of June 20, 2005 have put a rose color back on the cheeks of most hospitals. The median operating margin stands at 1.9%, the highest since 1997 when hospitals reported a median of 3.2%., but well above the year 2000 numbers when the median for hospitals was only .5 of 1%. The total profit margin for hospitals, which includes investment income and auxiliary operations showed a 2004 median of 4%, the best since 1998 when the median was 4.5%. The ratio of for profit per admission at .66 is on track to hit its best mark in over ten years. The median debt service coverage is running at a comfortable 3.7x, which within the range for an “A” credit rating on a hospital. Hospital cash cushions as measured by days cash on hand (137.4 days) are also likely to surpass the previous highest point in over a decade. The better financial numbers offset what has been a sharply rising trend of write-offs for charity care and bad debts due to an increasing number of uninsured patients.
Slightly rising occupancy is an interesting trend that has been building over the past eight years as hospitals have been reluctant or unable to increase bed capacity due to reimbursement pressures to maintain shorter stays. While the actual percentage change of occupancy has not grown fast, it has been steady. In 1997, the median hospital level was 59%. But, in each of the last seven years it has inched up annually to its current median level of 63.3 days. This may be an important factor as to why full time equivalent staffing is now at its highest level relative to the number of occupied beds since the beginning of the 1990s. Higher occupancy might dictate more capital construction to provide beds for the nation’s growing roll of elderly.
This is likely to become an increasing burden and challenge as hospitals have been issuing debt primarily for modernization and not for additional capacity. At the same time, hospital facilities by and large are showing a higher age of overall plant as measured by average age of net fixed assets – which in 2004 is on par with the previous year of 9.8 years, but still the highest in recent history.