Hospital Operating Margins Vary by Region: Sustainable Operations Remain at Risk

EVANSTON, IL — February 2, 2006 — Hope that the financially struggling U.S. hospital industry might have been on its way to recovery with its 2003 average operating margin of 5.05 percent was dashed by 2004 data released recently by Solucient®, the nation's leading source of information products for the healthcare industry.

In its report, The Health of Our Nation's Hospitals, 1997 – 2004, Solucient found a 20 percent decline in operating margins from 2003 to 2004; data indicates a 2004 average operating margin of 4.04 percent. Most industry analysts recommend a minimum operating margin of 4.5 percent and suggest 5.5 percent as a goal.

Overall, Solucient's data show hospitals continuing to post lower operating margins since the Balanced Budget Act of 1997, with operating margins hovering near 4 percent. The exception was 2003, which still fared worse than 1997.

While hospitals have slowed the rate of cost increases as measured by average cost per adjusted discharge (4.9% increase from 2003 to 2004), net reimbursement is not sufficient to offset those increases in operating costs.

"These operating margins suggest a potential long-term risk for many facilities," said Phil Gaughan, an operational improvement professional at Solucient. "The challenge is to manage operating margins under steadily increasing costs of operations and the need to continue excellence in delivery. Many facilities simply will not be able to do that."

Historically, hospitals in the West have been among the strongest financial performers. This trend was reversed in 2004 with the average operating margin for the West region declining dramatically to 2.79 percent, less than half of the region's 2003 average margin of 5.73 percent. Although declines were less dramatic in other areas of the country, all regions performed more poorly on average in 2004 than in 2003. Declines in average operating margins for other regions from 2003 to 2004 were South Central, -19.2 percent; Northeast, -14.9 percent; North Central,-9.3 percent; and South Atlantic, -8.6 percent.

The data also demonstrates a shift in quarterly trends related to operating margin. In the earlier years of the study, from 1997 to 2002, operating margins typically peaked in the first quarter and then dropped — sometimes significantly — by the second quarter. In contrast, the second quarter was the period of strongest financial performance during 2003 and 2004.

"This change in quarterly performance appears to be related to changes in patient volumes and seasonal illnesses," noted Gaughan, "but the most important observation is that operating margins have trended down over the past seven years."

Other key findings of the report are:

• All bed size and regional groups recorded weaker operating margins in 2004 than in 2003.
  
• Large hospitals (300 beds or more) regained the lead in average operating margin in 2004 by achieving a level of 4.25 percent.
  
• In the Northeast region, median length of stay was 4.32 days and operating margin averaged 2.86 percent. Nationally, median length of stay was 3.89 days and the operating margin average was 4.04 percent.
  
• The North Central and South Atlantic regions performed better than average in 2004, with average operating margins of 5.15 percent and 4.38 percent respectively.
  
• The average adjusted occupied beds measure for the average hospital remained steady from 2001 to 2004.
  
• Average cost per adjusted discharge continued to rise, increasing to $7,041 for all hospitals in 2004.
  
• Total spending on capital as a percent of total operating expense maintained a steady decline.

"The nature of the decline in operating margins — across the board, regardless of region or hospital size — underscores the dilemma for U.S. hospitals," said Gaughan "There isn't necessarily a single successful financial model for hospitals to follow."

For consumers, this can mean loss of facilities they rely upon and, for the industry, no easy answers are in sight.

"While many hospital closings involve smaller facilities, with large hospitals also suffering a decline in operating margins, it isn't clear that getting bigger or consolidating is a solution in all cases," Gaughan said. "While the industry is investing more total dollars in capital projects, capital expenditures as a percent of total operating cost have trended down in the last seven years."

About Solucient
Solucient® is an information products company serving the healthcare industry. It is the market leader in providing tools and vital insights that healthcare managers use to improve the performance of their organizations.

By integrating, standardizing and enhancing healthcare information, Solucient provides comparative measurements of cost, quality and market performance. Solucient's expertise and proven solutions enable providers, payers and pharmaceutical companies to drive business growth, manage costs and deliver high quality care. For more information, visit www.solucient.com.