A new report from the United Hospital Fund stated that one-third of New York City’s non-profit general care hospitals face financial problems serious enough to jeopardize their continuing viability. While reluctant to draw national conclusions based on a New York City-only study, United Hospital Fund president James Tallon tells State Health Watch that the issue could be a concern for any urban center.
The United Hospital Fund’s July 2003 Hospital Watch report updates information first developed in an earlier report that found that more than one-quarter of the city’s hospitals faced financial problems that signaled the potential for them not to continue to remain in operation. The hospitals were typically smaller (fewer than 300 beds) and provided a disproportionate share of care to low-income patients.
The updated analysis, with data from 2000 and 2001, found that all of the hospitals that were in financial jeopardy or at risk in 1999 were so again in 2001. And the hospitals that were financially stable in 1999 are showing signs of financial decline. "In addition to long-standing fiscal constraints, hospitals faced new challenges between 1999 and 2001, most notably significant declines in Medicare payment rates and large increases in the cost of labor, supplies, and insurance," the report said.
Although Medicare inpatient rates, which were reduced nationwide an average of 9.7 in 2000 and 10.8% in 2001, still adequately cover the cost of patients with Medicare, these changes have reduced hospitals’ ability to use Medicare reimbursement to cross-subsidize losses incurred from uninsured and other patients.
On the cost side of the ledger, nationally hospital costs grew by an average annual rate of 3.8% between 1999 and 2001, compared to 2.7% between 1997 and 1999, and 2.2% between 1994 and 1997. Labor was the most significant cost driver. In particular, the report said, "the nursing shortage forced hospitals to pay higher wages and rely on agency or contract nurses costing more than twice as much as salaried nurses."
Despite the adverse national trends in revenue and costs, there was little overall change in New York City nonprofit general care hospitals’ financial condition between 1999 and 2001. But the New York City hospitals in the aggregate remained in the red in 2001 and continued to lag far behind hospitals in other cities, according to United Hospital Fund.
To measure and track hospital financial performance, the Fund developed a rating system to categorize the financial condition of general care nonprofit hospitals and hospital systems in New York City. The rating system is based on hospitals’ historic and anticipated financial condition, and assigns hospitals to one of three categories:
• In-jeopardy hospitals typically incur large and recurring operating losses and working capital deficits and have a net asset deficit. Hospitals with this rating are dependent on significant positive change either within or external to the hospital to continue to be able to meet their financial obligations.
• At-risk hospitals have the capacity currently to meet their financial commitments, but adverse changes either within the hospital or in the environment will have a high likelihood of impairing their ability to continue to do so.
• Low-risk hospitals usually do not incur operating losses and do not have working capital or net asset deficits. Adverse changes within or external to the hospitals may lessen but not impair their ability to meet their financial obligations.
In its latest report, the United Hospital Fund rated 35 hospitals and hospital systems and found that 13 were in-jeopardy, seven were at-risk, and 15 were low-risk. The in-jeopardy and at-risk hospitals together accounted for 57% of all nonprofit hospitals in the city, with 45% of certified beds and 40% of discharges.
Long-term viability in doubt
The Fund report said that the "long-term viability of the 13 in-jeopardy hospitals in their present form is in doubt. Predominantly smaller hospitals that provide a higher proportion of care to low-income patients, these hospitals face large and recurring losses and working capital deficits, negligible short-term liquidity, and higher levels of debt."
High levels of debt and debt service contributed to the losses at in-jeopardy hospitals, as a larger share of their budget went toward debt expense. Thus, long-term debt as a proportion of total assets was 63%, more than double that of at-risk hospitals.
In-jeopardy hospitals’ median occupancy rate of 65% was lower than that of at-risk hospitals, but remained higher than that of large urban hospitals nationwide (58%).
The report stated that the seven hospitals shown in the at-risk category are the most disparate in terms of size, location, utilization patterns, and payer and service mix. Most recently had made significant organizational or corporate changes in an effort to reduce costs and debt. Because those changes created a large and sudden impact on many of their financials, an aggregate financial ratio analysis of at-risk hospitals was considered to have limited value for the report.
Although the 15 low-risk hospitals looked the best when compared to the other hospitals in the city, they still lagged behind median hospital performance in other U.S. cities. They had a higher occupancy rate and a growth in inpatient utilization, but had lower surpluses, which affects their ability to increase debt or internally fund new projects or services.
Operating margin for the New York City low-risk hospitals was half that at U.S. hospitals generally, as was debt service coverage. Although none of the low-risk hospitals changed rating between the two reports, they showed some signs of fiscal decline between 1999 and 2001. Thus, 10 of the 15 low-risk hospitals had declines in operating margin, current ratio, and debt and debt service ratios, although the specific hospitals with declines in those ratios were not consistent.
Improving financial status
Since the 1999 analysis, in-jeopardy and at-risk hospitals used a number of strategies to improve their financial condition, including changes in senior management and services offered. More than 25% also went through a corporate reorganization.
The report said that on the national level, analysts predict a stable outlook for nonprofit hospitals in the short term. Although expenses are expected to continue increasing at a higher rate than in the 1990s, revenues are expected to keep up due to utilization growth, driven by an aging population a d technological advances.
Weighted down
But, the report said, "New York City’s hospitals are weighted down with uncompensated costs associated with providing safety-net services and with disaster preparedness. Making matters worse, utilization declines in many at-risk and in-jeopardy hospitals represent an additional strain on the hospitals least able to bear it. For these hospitals, devising and implementing successful survival strategies will be crucial to their ongoing viability."
Mr. Tallon tells State Health Watch that while analysts often look at financial problems faced by academic medical centers, this report is a reminder that many community hospitals are in a challenging situation that needs to be addressed because of the concentration of uninsured patients they serve. "Through early 2001, we were looking at a pretty strong economy," according to Mr. Tallon. "This report tends to show that even after Sept. 11, 2001, we didn’t build or buy our way out of the problem."
He says the smaller community hospitals in New York City are slowly and surely losing business, which exacerbates their financial situation. The United Hospital Fund, he says, has undertaken a series of programs to improve health insurance coverage and Medicaid and has been involved in policy development around these issues. "With rising health care costs, the persistent large problem of people without insurance coverage is not something we can live with over the long run," he says.
[The Hospital Watch report is available at www.uhfnyc.org. Contact Mr. Tallon at (212) 494-0700.]
A new report from the United Hospital Fund stated that one-third of New York Citys non-profit general care hospitals face financial problems serious enough to jeopardize their continuing viability.
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