Hospital profit margins dip again

Association to seek a rate increase of 4% to 4.5%

March 22, 2001|By M. William Salganik | M. William Salganik,SUN STAFF

Profit margins at Maryland hospitals slipped again last year, the fourth straight year of decline, according to figures released yesterday by the Maryland Hospital Association.

Operating margins for the hospitals as a group, though tight, gained slightly in 2000, to 1.1 percent from 0.9 percent in 1999, according to the MHA. But total margins - including nonhospital items such as investment income - dipped to 2.4 percent from 2.5 percent in 1999.

The profit squeeze prompted the MHA earlier this month to say that it would seek a larger than planned rate increase for the fiscal year beginning in July. Yesterday, it specified the increase it is seeking - 4 percent to 4.5 percent.

"Without some kind of improvement in rates, hospitals will have to continue to cut staff," said Calvin Pierson, president of the hospital association. He said the hospitals "need a 4 to 6 percent margin to be financially healthy."

While hospitals got a 2.5 percent increase this year, Pierson said, that wasn't enough to match the inflation in the costs hospitals pay, so the hospitals need an extra rate boost to make up the difference. The largest unexpected expense, he said, has been an increase in nursing salaries to attract and retain staff in a time of shortage.

The insurers who pay the hospitals, however, are opposed to any rate increase above inflation, which is projected at 2.4 percent.

"Hospitals nationally have lived with [revenue increases of] 1 percent less than inflation for years and years," Harold Cohen, a consultant and former rate regulator, said yesterday. "If Maryland hospitals had the same productivity as hospitals nationally, their profitability would go up by 1 percentage point."

Cohen represents two insurers, CareFirst BlueCross BlueShield and Kaiser Permanente, on hospital rate issues.

Robert Murray, executive director for the rate-setting Health Services Cost Review Commission, said the new MHA figures show that the financial condition of Maryland hospitals is about the same as it was last year.

Although the commission decided last year that hospitals would get an increase this year equal to inflation, he is now recommending they get 0.5 percent above that.

"We recognize that the cost trends are higher than anticipated," Murray said. "That's why we recommended a supplement."

Murray added that hospital margins have been reduced by losses in related businesses the commission doesn't regulate, such as physician practices and home health care. "We can't set rates to cover the cost of unregulated services," he said. The commission will make a decision in the next month or two on rates for the new fiscal year.

Overall, according to MHA, 21 of Maryland's 52 general and psychiatric hospitals were in the red in 2000, compared with 23 in 1999.

Beth Wexler, a vice president and senior analyst at Moody's Investors Service, said that, while margins have been tight at Maryland hospitals the last few years, generally the hospitals have not had their bond ratings cut.

Moreover, Wexler said, with the commission granting rate increases in the future based on inflation, "we see the horizon stabilizing."

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