Most hospitals finish 2009 in the black–but future looks bleak

More than three-quarters of Connecticut hospitals posted a positive total margin during the 2009 fiscal year, a reversal from the previous year, when fewer than half did, according to a report released by the state Office of Health Care Access.

But those figures might not indicate a smooth future for Connecticut hospitals.

While most hospitals were in the black in fiscal year 2009, less than a third of the state’s 30 acute care hospitals achieved margins considered adequate by industry standards.

And as of this May, a third of the state’s hospitals were operating at a deficit, according to Stephen Frayne, senior vice president of health policy at the Connecticut Hospital Association.

“The environment isn’t getting easier. I think it’s becoming more difficult,” Frayne said.

Thomas Marchozzi, executive vice president and chief financial officer of Hartford Hospital and its parent company, Hartford Healthcare Corp., agreed. The OHCA report presented an accurate picture of what happened, he said, but should not be used as a guide to what is likely to happen next.

“It doesn’t reflect the future,” he said. “The future is going to be completely different.”

Frayne noted that in the next year, Connecticut hospitals are likely to see no increase–or even or a slight decrease–in Medicare funding, which accounts for more than 40 percent of hospital revenue. Hospitals could also see cuts in Medicaid, which accounts for 10 to 15 percent of revenue, as state lawmakers grapple with a massive budget deficit, he said.

The OHCA report warns of other pressures hospitals are likely to face because of an aging population, increased competition, and the implementation of health reform, the effects of which are not yet clear.

The report described the hospitals’ 2009 financial performances as demonstrating “resiliency to a challenging economic climate.”

On average, Connecticut hospitals posted a 2.62 percent total margin for the 2009 fiscal year. The previous year, the average  was a 0.9 percent loss.

Total margin refers to revenue achieved through both operations and non-operational sources such as investments and philanthropy.

In 2009, Danbury Hospital posted the highest total margin, 8.01 percent, while Johnson Memorial Hospital in Stafford Springs had the lowest, a loss of 8.48 percent.

Frayne said the industry benchmark is at least a 4 percent total margin. Nine hospitals achieved that in 2009 – Danbury, St. Mary’s Hospital in Waterbury, Middlesex Hospital in Middletown, Connecticut Children’s Medical Center in Hartford, Sharon Hospital, Lawrence & Memorial Hospital in New London, Norwalk Hospital, The William W. Backus Hospital in Norwich, and Yale-New Haven Hospital.

The University of Connecticut’s John Dempsey Hospital, which has struggled financially in recent years, had a 1.25 percent total margin.

The improved financial picture for hospitals statewide came from controlling costs, increased revenue and a decrease in losses from non-operating items such as investments and donations, according to the report.

Until recently, many hospitals used non-operating revenue to help offset low margins or deficits from patient care. But during the past two fiscal years, Connecticut hospitals lost money on non-operating expenses, a reflection in part of investment losses in the economic downturn and a decline in philanthropy, according to the OHCA report.

Frayne said the economic downturn showed the flaw of relying on non-operating income to cover the cost of providing medical care.

“In this recession, it was shown fairly clearly that that can be a somewhat risky strategy,” he said.

Without the ability to rely on investment income, Marchozzi said, hospitals will need to raise their operating margins. But doing so by controlling costs can be difficult since much of the costs hospitals incur are fixed – the cost of buildings, for example, and staffing in the emergency room and in other units.

Raising revenue will be difficult too. With patient volumes flat or decreasing in much of the state and no increase in payments from government health programs, Marchozzi said more pressure will fall on private insurers to make up some of the shortfall in government payments – a cost-shift that already occurs. But insurance companies are also likely to face financial pressures as coverage mandates increase under the federal health reform law, making it more difficult for hospitals to pass along costs.

“We’re going to have to find a different way of delivering health care,” he said.