Hospital operating profit up a healthy 47 percent

February 10, 1994|By Patricia Meisol | Patricia Meisol,Sun Staff Writer

Operating profits at Maryland hospitals rose 47 percent in their latest fiscal year, while, for the first time in 18 years, the average cost of admission increased more than the national average, according to a new report on hospital finances.

The industry's profits and high cost increases come at a challenging time for hospitals. Many are losing business to less expensive competitors and face mounting pressure to lower costs.

The regulatory system, meanwhile, continues to reward hospitals that become more efficient by allowing them to enjoy a larger profit.

"We feel it is a one-year issue, not part of a trend," said Calvin M. Pierson, president of the Maryland Hospital Association (MHA).

Mr. Pierson added that hospitals would not receive as large an increase in rates next year because of their performance this year.

He said the state's regulatory system was self-correcting and that the faster-rising costs would not continue.

He also noted that hospital costs in Maryland remained 11 percent below the national average.

The annual financial report released yesterday by the state's hospital regulators, the Health Services Cost Review Commission, said net profits at the state's 52 acute care hospitals rose 24 percent, to $134.1 million, in fiscal 1993.

And profits would have been higher at many more hospitals had they not refinanced debt, which resulted in one-time charges.

Revenue was $4 billion, an increase of 9.5 percent over the prior year.

The report also showed admissions dropped for the first time in eight years, by 1 percent.

At the same time, though, the average cost per admission rose 9.6 percent, to $5,448.

That increase was 2.3 percentage points above the national average. The year before, Maryland's cost per admission grew at a pace 4.2 percentage points below the national average.

The Maryland industry's comparison to the national average is important because it determines whether Maryland can continue enjoy a waiver from federally determined Medicare reimbursement rates.

To keep the waiver, the state is required to keep cost increases below the national average.

Even though hospitals didn't do so this year, the state is not in danger of losing its waiver at this time because Maryland is judged on its performance since 1980, not just in a single year, said John M. Colmers, director of the cost review commission.

The waiver is important because the system has allowed Maryland to tack on the cost to treat the uninsured in its hospital rates.

Everybody pays a portion of the additional costs, including the federal government, when it reimburses hospitals for Medicare patients.

Still, regulators say that for most indicators -- profits, cost per admission, price per patient, etc. -- Maryland hospitals still ranked below the national average.

Comparisons with other hospitals, however, are considered increasingly irrelevant as nonhospital competitors have begun providing lower-cost treatments and are taking a larger share of the market.

In response, Maryland industry leaders are scrambling to adjust the regulatory system, including seeking ways to cut rates for hospital outpatient services and to force freestanding competitors to take some charity care.

The leaders

According to the state report, 45 of the state's hospitals recorded a net profit in fiscal 1993.

Among the largest were Greater Baltimore Medical Center, with a $7.8 million profit; Holy Cross, $8.7 million; Memorial in Cumberland, $5.5 million; St. Agnes, $10.3 million for a fiscal year ended December 1993; and St. Joseph's, $7.4 million.

The report showed seven hospitals recording net losses in fiscal 1993, ranging from $122,300 at Frostburg to $7.7 million at the University of Maryland.

Others reporting net losses were Children's Hospital, $1 million; Fort Washington Medical Center, $961,900; McCready Memorial, $455,200; Mercy, $484,000; and North Arundel, $576,800.

At two of the hospitals, University and Mercy, losses were caused by one-time accounting charges as the hospitals refinanced debt to take advantage of lower interest rates.

Both hospitals reported operating profits before the charges.

Two other hospitals would also have reported losses had their refinancing efforts been included in the state report.

A separate report issued earlier by the Maryland Hospital Association showed Johns Hopkins and Sinai Hospital with losses of $3.8 million and $6.3 million respectively because of the accounting charge.

Both hospitals showed operating profits.

At least nine hospitals reported operating losses, including some for the fourth year in a row, but were profitable overall.

These include Easton Memorial, Union Memorial, Kernan and McCready Memorial.

Branching out

Increasingly, hospitals are counting on income from other sources, including unregulated businesses and investments, to pay the bills and keep them in the black.

For instance, Easton's operating losses in 1993 doubled to $1.2 million, but the hospital ended up with a net profit of $2.7 million because of earnings from new ventures including diagnostic services opened off-campus.

"That's been an enormous growth area in the past three years," said Patti Willis, Easton vice president of public affairs.

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