David Koepke

Hospitals maintained their usual operating margins through the third quarter of calendar year (CY) 2008. Patient margins, indicating how well hospitals would meet operating expenses from net patient revenues alone, also were at levels comparable to usual levels prior to the recent economic crisis. However, hospital total margins declined for every class of hospital in the first three quarters of CY08, dipping below operating margins in the first quarter and approaching zero in the third quarter.

 View exhibit 1

The hospitals' nonoperating margins began to fall in the third quarter of CY07, and their decline accelerated in the second and third quarters of CY08 (see exhibit 2). These nonoperating margins depend primarily on investment gains or losses. Tax-supported capital investments and contributions and donations also constitute a small part of the nonoperating income of some hospitals.

View exhibit 2



Investment Losses

The hospitals' nonoperating losses reflect only realized or permanent investment losses. Much larger unrealized investment losses are indicated on hospital balance sheets, primarily for major teaching hospitals, which showed significant decreases in both assets whose use is limited (AWUIL)--also called "restricted assets"--and unrestricted assets through the third quarter of 2008. In major teaching hospitals restricted assets have declined by a median $60 million in the past three years, whereas in other hospitals these investments are largely unchanged (see exhibit 3)3 . Major teaching hospitals have also given up a median $10 million of their gains in unrestricted assets in the past year (see exhibit 4)4. Other hospitals have, on average, maintained or even increased their unrestricted assets. Medium and large teaching hospitals saw a decrease in unrestricted assets that was similar to that experienced by major teaching hospitals, although with much smaller dollar amounts.

View exhibit 3                 View exhibit 4


exh3              exh4

 The asset decreases observed in major teaching hospitals do represent investment losses, as these hospitals did not shift assets to shorter-term assets, reduce debt, or increase capital expenditures during this period. These losses have been substantial, reducing the hospitals' capacity for capital expenditures both directly (having fewer resources available to spend) and indirectly (by rendering these hospitals less creditworthy).

It should be noted that for all U.S. hospitals, on average, hospitals in each class may have experienced worse declines in margins and investment losses. Hospitals included in this study are, on average, larger and more profitable and have greater financial strength than other hospitals in each class.

For this analysis, quarterly hospital financial data were reviewed for the second quarter of calendar year (CY) 2005 through the third quarter of CY08 for general acute care community hospitals. The quarterly samples consisted of average of 439 reporting hospitals, comprising 76 small community hospitals (26-99 beds), 127 medium community hospitals (100-249 beds), 74 large community hospitals (250+ beds), 102 teaching hospitals, and 60 major teaching hospitals.

Data were developed by the Healthcare business of Thomson Reuters.


David Koepke, PhD, is a senior scientist, Center for Healthcare Improvement, Thomson Reuters, Evanston, Ill. (david.koepke@thomsonreuters.com).

Publication Date: Monday, February 02, 2009

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