A Cautious Diagnosis Hospital Administrators See Healthier Bottom Lines, But Remain Wary About The Future

For many Massachusetts hospitals, the path toward financial stability is becoming slightly clearer.

A report released in December by the Mass. Division of Health Care Finance and Policy (DHCFP) revealed that the Commonwealth’s hospitals showed a significant overall improvement during the fourth quarter of fiscal year 2005, which for most hospitals ended on Sept. 30.

The DHCFP examines the health of the state’s hospital industry on a quarterly basis, examining three specific areas: profitability, liquidity (a hospital’s ability to meet short-term obligations), and solvency (the capability to finance assets and take on new debt). According to its Q4 findings, most acute care hospitals fared well in all three categories, with 86{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of all hospitals logging positive total profit margins, up from 79{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} in FY ’04.

Operating margins also improved during each quarter of FY ’05, with 77{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of all hospitals experiencing operating gains, up from 58{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} in FY ’04. In addition, the DHCFP reported that the industry showed more efficient management of days in accounts receivable and an improvement in the average length of time taken to pay current debts, overall improvements in the areas of debt-service coverage and cash flow, to long-term debt obligations.

One gauge of the industry’s health in terms of solvency, the ‘equity-financing ratio,’ measures the proportion of a facility’s total assets financed by equity. If a hospital is highly leveraged, the DHCFP report explains, it may have difficulty securing access to debt financing. The equity-financing ratio remained relatively constant compared to FY ’04, with the majority of hospitals landing above the 30{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} industry benchmark. However, about one-third of Massachusetts hospitals fell below that mark, indicating possible long-term issues for that group.

Of the 11 acute care hospitals across Western Mass., six saw improvement in their total profit margins and nine maintained an operating surplus, compared to just six last fiscal year (see chart.)

However, while some numbers are promising, hospital administrators in the region contend that there are still several areas of difficulty facing the area’s hospitals. Some did see a loss in profitability and problems in some of the other areas indicating financial health, while others saw improvement in the hard numbers, but maintained low profitability margins.

At A Glance: Profitability Margins, Western Mass. Hospitals FY04 and FY05*

FY04 FY05 (Quarter 4)
Berkshire Medical Center 3.17{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} 4.74{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}
Baystate Medical Center 5.49{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} 7.11{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}
Cooley Dickinson Hospital 4.72{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} 3.44{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}
Fairview Hospital 1.15{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} 2.34{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}
Franklin Medical Center 1.84{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} 1.66{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}
Holyoke Medical Center -2.23{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} 62{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}
Mary Lane Hospital .29{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} 4.76{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}
Mercy Medical Center 1.97{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} 1.01{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}
Noble Hospital -1.21{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} -2.07{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}
North Adams Regional Hospital -2.22{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} -8.89{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}
Wing Memorial Hospital and Medical Centers -1.40{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} 2.45{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}

* Figures represent the total profitability margins for the 11 Western Mass. acute care hospitals, based on their unaudited internal financial statements for the fourth quarter of 2005. Total margin includes the operating margin and the non-operating margin. Figures representing liquidity, solvency, and capital structure also factor into a facility’s overall financial health. For these statistics, visit the Division of Health Care Finance and Policy Web portal at www.mass.gov.

Hank Porten, president and CEO of Holyoke Medical Center, said that while HMC finished in the black for FY ’05, it was largely due to a $2.1 million allocation from the state from the distressed hospitals fund.

“Without that money we would have recorded a loss,” he said, noting that although the hospital saw improvement on many fronts, the overall financial health of HMC has yet to stand on terra firma. “In general, I think this report tells us that many hospitals across the state fared well, but that many are still recovering, and having some difficulty in doing so.”

HMC reported a .62{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} total profit margin for Q4 of FY ’05, compared to –2.23{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} in FY ’04. The hospital also logged an operating surplus of $371,191, up from a $2.1 million loss in FY ’04. While the numbers are positive, Porten said they are less cause for celebration and more for careful, plotted plans for next year, in order to rectify problems and further spur momentum for growth.

HMC represents one of the facilities still struggling with equity financing, for instance. Porten explained that the equity financing ratio is important because it effectively measures a hospital’s current situation against its ability to thrive in the future.

“It represents the most major long-term problem we face,” he said. “If we can’t replace our assets, eventually we’ll consume ourselves. Keeping current with technology becomes increasingly difficult, and if a hospital isn’t up-to-date, physicians start to drift away.”

What’s more, Porten said he sees some challenges specific to Western Mass. that complicate the issue of fiscal health within its hospitals.

“Proximity does play a role,” he said, referring to the distance between Western Mass. hospitals and the decision-makers on Beacon Hill. “Boston hospitals have more eyes watching them, and the attention to our needs is not what we’d like.

“From an operations perspective, Western Mass. also includes a fair amount of low-income producing communities, and in many cases, like ours, the hospital is the largest employer,” he added. “That creates a unique situation, because if we start to suffer, the whole community suffers.”

Bob DeVey, senior vice president of finance for the Sisters of Providence Health System, agreed with Porten that several things factor into the overall budget picture within Massachusetts hospitals, outside of hard numbers.

“I’ve worked in Massachusetts for most of my career, but I’ve also worked in the Midwest,” said DeVey. “I’m shocked at how low the operating margins are in Massachusetts hospitals compared to other parts of the country.

“I agree we’re doing better, but we’re not where we need to be,” he continued. “The balance sheets in the state are fairly weak, and that’s what we need to be looking at.”

He added that while Mercy Medical Center did report a small loss in profits from FY ‘04 to FY ‘05 – down less than 1{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} – the numbers don’t tell the whole story.

“It’s ironic that we made less money, because we did more business,” he said. “Health care finances are a unique animal, and reimbursement rates are still not where they need to be, which is an ongoing part of the problem.”

And while it’s a problem most Massachusetts hospitals are used to, DeVey said those low oeprating margins and reimbursments rates are not something to be overlooked, even as the financial picture improves.

“The public needs to be educated on the intrinsic need for hospitals to make a profit,” he stressed, “in order to make technological advances and reinvest in the community.”

Still, the DHCFP contends that the improved profitability in the majority of the state’s hospitals is a sign that overall, the industry experienced improved ability to meet pressing financial obligations. That means that next year, many hospitals, including those in Western Mass., could be off to a running start, with less difficulty meeting payments in the new year.

The sentiments among area hospitals remain guarded, however:

“We need to make more money that we are,” said DeVey. “It’s that simple.”

Jaclyn Stevenson can be reached at stevenson@healthcarenews.com