US hospitals facing financial stress

Many US hospitals, both for-profit and non-profit, are facing financial stress in this economic recession.

Jeffrey Stafford, writing for the stock and fund analysis firm Morningstar, contends that "Like their patients, hospitals are ill". His report specifically references for-profit hospitals. Under law, all hospitals maintaining an ER must stabilize all patients who present regardless of insurance. Therefore, hospitals undergoing financial stress are a public policy issue, even if they are for-profit hospitals.

Patients are delaying care, at risk to their own health, in this economic environment. This includes insured patients who are underinsured - their insurance excludes their pre-existing conditions, has lifetime benefit caps on a condition considered to be expensive, or has cost-sharing provisions (e.g. premiums, co-pays or co-insurance*) that cause high out of pocket costs.

In addition to the insurance issue, US hospitals must keep track of their payer mix. Medicaid, the program for the poor, and Medicare, the program for the elderly, generally reimburse hospitals below the latter's cost of providing the care. Medicaid pays more poorly than Medicare. Of course, Medicaid is preferable to having an uninsured patient, since a hospital will get reimbursed little, if at all. Medicaid is generally a prime target for state governments to cut; in their defense, Medicaid expenses have grown considerably and are often a strain on state budgets.

For better and for worse, hospitals rely on privately insured patients to generate their operating margins. Essentially, they shift costs to the private insurers. All told, the payer mix at all US hospitals is deteriorating - more uninsured and Medicaid patients are showing up.

All hospitals have a high degree of what is known as operational leverage. Their fixed costs (as opposed to variable costs) are relatively high, since they have to stay open no matter what. Declines in patient volume affect their bottom lines severely.

US hospitals rely heavily on debt to finance their operations. These days, it is very difficult to raise debt at a reasonable price unless (and sometimes even if) a company has an excellent credit rating. Any hospitals that need to raise debt will have problems doing so at reasonable rates. Normally, non-profits can raise debt at better rates, since their bonds are usually tax-free and can offer lower interest rates. However, the tax-free debt market is facing similar stresses.

US nonprofits face many of the same stresses. The Michigan Health and Hospital Association documents similar problems to for-profits. US non-profit hospitals can take donations and usually have endowments, so they face the additional challenge of significantly declining donations and endowments that have half vanished with the stock market. This can be a big problem, since nonprofits often draw regularly on their endowments and charitable donations.


* Co-pay: flat fee that you pay when you access a service or get a prescription drug. May vary, e.g. a copay of $5 for generic drugs or $10 for branded.
Co-insurance: same as the above, but a percentage fee, e.g. 10% co-insurance for hospital visits.