Is the recession in the United States coming to an end?
That appears to be the thinking of some analysts on Wall Street, powered as much by hope as by a preponderance of evidence.
But if you work in the U.S. hospital industry, particularly on the not-for-profit side, you might think the question itself is absurd.
“Is the recession over for hospitals?” you might ask, thinking “Not by a long shot.”
Most of the data appears to be on your side, but it doesn’t lead to uncomplicated conclusions.
For instance, in its annual ‘Median Ratios for Nonprofit Hospitals and Healthcare Systems’ report, Fitch Ratings reveals that after nearly a half decade of consistent improvement or stability in hospital financial metrics, the 2009 medians for acute care hospitals showed declines for most financial indicators.
According to the report, large losses in hospital investment portfolios – some as high as 30 percent to 40 percent – hammered liquidity, while bottom-line profitability was squeezed by the significant year-over-year drop in investment income and the higher cost of capital.
In regard to the nonprofit hospital industry and the healthcare system sector as a whole, Fitch currently maintains a negative outlook.
But wait a moment. A recent research report by the Thomson Reuters Center for Healthcare Improvement noted that the operational and financial performance of U.S. hospitals was actually improving.
The research team at Thomson Reuters found that the median profit margin of U.S. hospitals increased from 0.17 percent in the third quarter of 2008 to 3.1 percent in the first quarter of 2009.
Examining financial data from 400 U.S. hospitals, the report concluded that “all classes of hospitals – small, medium and large community hospitals, teaching hospitals and major teaching hospitals” showed positive median margins.
Gary Pickens, chief research officer at Thomson Reuters, told me that while those numbers look much better than in late 2008, they are weak by historical standards. He acknowledged that around 30 percent of hospitals are still operating in the red.
Still, Pickens said hospitals’ ability to maintain their operating margins through this period reflects their ability to match expenses to revenues. He credited much of this success to reductions in labor costs by approximately 3 percent year-over-year through the first quarter of 2009.
“Large community hospitals in particular went from losers to big winners in 2009,” Pickens said.
So, not to worry? Not necessarily, according to Pickens.
He said the future for hospitals in the medium term would depend on the degree to which the investment markets remain strong.
Fitch, looking out 12-24 months, expects that many of the negative pressures currently facing hospitals will continue to exert varying levels of stress, and the agency predicts that ratings downgrades will exceed upgrades.
Nevertheless, whether you’re an optimist or a pessismist, strategic planning and close monitoring of your finances is critical, particularly for smaller hospitals and not-for-profits.
But of course, you already knew that.
One of our readers who occupies a leadership role in the rural hospital community told us recently that “eroding margins and what to do about them dominates the minds of CEOs and CFOs of rural hospitals.”
This hospital official was not surprised by the conclusions of a recent report from the credit rating agency A.M. Best, which warned that small to mid-sized, stand-alone, not-for-profit hospitals will remain challenged in the near term.
The A.M. Best report attributed its pessimistic assessment to the volatility in the capital and investment markets, small hospitals’ growing need for capital expenditures, as well as the general negative economic conditions.
Ultimately, then, while the outlook may be brightening for some on Wall Street, hospital officials can’t yet afford to rest easy.