Hospital Profitability in Pennsylvania: A 2014-2015 Update (2 of 2)

In part 1 I presented an updated data set for Pennsylvania hospital financial performance and compare it against my 2010 analysis.

Discussion

About one third of the hospitals are money-losing propositions operationally.

Interest

I was always interested in financial performance of hospitals during MBA training.  Then, during PGY-1 internship at a Philadelphia hospital, my world was flipped upside down through a completely revamped inpatient structure.   So when when this guy became famous by taking chargemaster data from a sub-subspecialty hospital and generalized it as the billing cost of all hospitals, I decided to do my own data analysis.

The goal has been to evaluate the performance of hospitals with respect to patient care, the analysis is performed using operating incomes rather than gross revenue.  Operating incomes describe the revenue/cost arising from the everyday operation and excludes one-timers like donations, grants, fines, fire, flood, etc.

Observations

Although in FY 2014, the mean hospital operating margin is negative (-0.25%), the value is heavily influenced by a single outlier.  Shriners Children has an operating margin of -241%.  A fairer comparison of overall state-wide hospital financial performance may be to use the median, which shows an increase of 0.7% operating profit margin rather than a 2.75% decrease by mean.

The operating income is a function of both profitability as well as size.  In both 2010 and 2014 we see clearly dominant players such as Hospital of Univ. of PA and Children’s Hospital of Philadelphia.  When normalized using operating margins, the S-shaped curve remains (sideways due to the orientation of the graph) but is less disparate.

Nevertheless, the 2014 data continues to show that many hospitals in PA make very low margins.  As with 2010, about one third of the hospitals are money-losing propositions operationally.

Caveats

Do note that these numbers are reported values which may or may not reflect the true revenue and cost structures of a hospital.  Furthermore, a hospital that is operationally inefficient may be able to cross-subsidize its losses from another source.  A large health system also may be able to cross-subsidize losses from one hospital through a profitable second hospital.  For example, Chester

Another caveat to remember is that these values are state functions in that different hospitals with similar incomes and margins likely achieved them via different routes.  For instance, one profitable hospital may achieve so by reducing 30-day readmissions which increases cost but are unreimbursed (+/- penalty from  quality metrics).  Another hospital may do so by reducing length of stay, as each additional day of hospital stay increases cost but does not necessarily increase revenue.  Nevertheless, Pennsylvania financial report describes a state-wide length of stay of 5.2 days which was stable between 2010 and 2014.

Conclusion

In the end, as physicians we see such limited areas of clinical care in our specialty that we lose the forest for the trees sometimes.  After all, healthcare is a service that happens to also be business.  While a care provider’s job primarily concerns the delivery of health, we must remain vigilant of birds-eye financial trends that drive C-suite level decisions which affect both our lives and those of our patients.

Image Credit: http://www.texasenterprise.utexas.edu/

Howard Chen

Vice Chair for Artificial Intelligence at Cleveland Clinic Diagnostics Institute

Howard is passionate about making diagnostic tests more accurate, expedient, and affordable through disciplined implementation of advanced technology. He previously served as Chief Informatics Officer for Imaging, where he led teams deploying and unifying radiology applications and AI in a multi-state, multi-hospital environment. Blog opinions are his own and in no way reflect those of the employer.