New Report Assesses Financial Health of California Hospitals

Gap persists between ‘haves’ and ‘have-nots,’ with nearly one-third losing money


The financial health of California hospitals improved during a five-year period, but one-third of the state’s hospitals continue to lose money, reflecting a continuing wide disparity in their performance, according to a comprehensive new report released today by the California HealthCare Foundation (CHCF).

Produced by consulting firm PricewaterhouseCoopers, the analysis of 355 general acute care hospitals in California between 2001 and 2005 builds upon the results of an earlier CHCF report that warned of a looming crisis in which a large proportion of financially under-performing hospitals would face closure.

According to the new report, Financial Health of California Hospitals, that crisis has not materialized. Although 28 general acute care hospitals closed during the five-year period, the 7% decline was similar to the 1995 to 1999 period. In fact, most California hospitals survived the first five years of the decade stronger financially than predicted.

However, a gap in financial performance between the most profitable and least profitable California hospitals persists. In 2005, median operating margin for the lowest performers (bottom quartile) was negative 5.6% compared to positive 7.3% for the high performers (top quartile).

“The good news is that hospitals are doing better overall, and the widespread closures forecast in the earlier report did not occur,” said David O’Neill, senior program officer at CHCF. “Yet, by continually operating in the red, low-performing hospitals face significant challenges in maintaining the staff, technology, and facilities necessary to effectively serve their communities,” he said.

Size, Location Play a Role

Despite steady improvement in net operating margins each year since 1999, and a move into positive territory beginning in 2000, the latest study finds median operating margins for general acute care hospitals in California hovered near the break-even point over the five-year period.

Size, type of ownership, system affiliation, and geographic location all factored into profitability, with small hospitals (fewer than 150 beds), district hospitals, city/county hospitals, and rural hospitals all disproportionately represented in the lower quartile.

Nonprofit hospitals, particularly in urban areas of the state, had the most days of cash on hand, highest operating margin, optimal debt service coverage, and debt-to-capital ratios.

Comparing regions of the state, location was a factor in profitability: Hospitals in Los Angeles County had a negative median operating margin; Northern and Sierra counties’ hospitals were slightly above break-even; and those in San Diego and Orange Counties performed just under 1%. These regions have a larger share of safety-net hospitals designated to serve the uninsured and underinsured. Hospitals in the Sacramento region averaged the highest operating margins in 2005 at 10%.

Poor Credit Threatens Capital Planning

The new analysis finds that the median level of 40 days cash on hand for California hospitals compared to the lowest investment grade of rated hospitals nationally. This measure of liquidity slid in the latest five-year period. City- and county-owned hospitals in the state showed the greatest level of decline (15%) between 2001 and 2005, ending with less than 30 days of available cash to pay for expenses.

In 1999, the median credit ratio profile of a California was one notch above junk status. In comparison, in 2005 approximately 144, or 44%, of hospitals in California had operating margins equal to S&P ratings below investment (junk) level.

“California hospitals operate with less margin than those in the U.S. overall,” said Scott Burns, director, at PricewaterhouseCoopers. “Thin operating margins mean hospitals have limited cash and other liquid reserves to borrow against and, correspondingly, lower credit ratings. An inability to borrow money at favorable interest rates has negative consequences on planning for and funding needed expansion and complying with deadlines imposed by SB 1953, the state’s seismic hospital safety law.”

The PricewaterhouseCoopers report highlights a number of important financial and other trends in California’s multi-billion dollar hospital industry, including:

  • Median operating margin for the state’s 355 general acute care hospitals was 1.31% in 2005.
  • Per capita hospital beds in California continue to be significantly less than that for the nation, and dropped at a faster rate between 2001-2005 (13.6% decline in California versus 6.9% nationally).
  • California hospitals are treating sicker patients than they were five years ago. Case mix index (CMI), a measure of the severity of illness, has increased since 2001, along with average length of stay (ALOS) for acute care patients. Total CMI increased from 1.02 in 2001 to 1.05 in 2005. Acute care ALOS increased from 4.4 days in 2001 to 4.5 in 2005.
  • Hospitals in California have become more dependent on revenue from commercial insurers (private health plans) as government payment rates have not kept pace with rising expenses. The share of net revenue from private insurance increased from 40% in 2001 to 45% in 2005, while the combined Medicare and Medicaid (Medi-Cal) share decreased from 55% in 2001 to 50% in 2005.
  • Salaries and benefits were the fastest growing expenses for hospitals, with benefits increasing at a 16% compound annual growth rate between 2001 and 2005.

Methodology

The PricewaterhouseCoopers study assessed data and information available for California’s general acute care hospitals over the period 2001 to 2005. The analysis relied on the Selected Annual Financial dataset, a subset of the standardized, audited disclosure reports that general acute care hospitals provide to the California Office of Statewide Planning and Development (OSHPD). It focused on the 350 to 385 general acute care hospitals that reported each year and excludes specialty hospitals, such as psychiatric hospitals, chemical dependency recovery hospitals, long-term care acute hospitals, state hospitals, rehabilitation facilities, skilled nursing and long term care facilities, and the Shriners Children’s hospitals.

The publicly available hospital financial data was supplemented by information from other OSHPD databases and outside sources, including the American Hospital Association, the California Hospital Association, Ingenix, the Healthcare Financial Management Association, Centers for Medicare and Medicaid Services, state and U.S. Census data, and published literature.

Additional Resource

A related snapshot that highlights hospital market trends is available for download through the link below.


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About the California Health Care Foundation

The California Health Care Foundation is dedicated to advancing meaningful, measurable improvements in the way the health care delivery system provides care to the people of California, particularly those with low incomes and those whose needs are not well served by the status quo. We work to ensure that people have access to the care they need, when they need it, at a price they can afford.