Did the strong get stronger and the weak get weaker? Examining changes in hospital financial condition

Journal of Health Care Finance

Volumn 33, Issue 2, 2006, Pages 55-69

  Bazzoli, Gloria J ^a   Lindrooth, Richard C ^b   Clement, Jan P ^a   Zhao, Mei ^c   Chukmaitov, Askar ^d  

^a VIRGINIA COMMONWEALTH UNIVERSITY   (United States)

^b MEDICAL UNIVERSITY OF SOUTH CAROLINA   (United States)

^c UNIVERSITY OF NORTH FLORIDA   (United States)

^d FLORIDA STATE UNIVERSITY COLLEGE OF MEDICINE   (United States)

Author keywords

Changes in performance; Hospital financial performance

Indexed keywords

ARTICLE; DATA ANALYSIS; ECONOMIC ASPECT; ECONOMIC DEVELOPMENT; FINANCIAL MANAGEMENT; GENERAL HOSPITAL; HOSPITAL COST; HOSPITAL FINANCE; MEDICARE; POLICY; PROSPECTIVE PAYMENT; RURAL AREA; TEACHING HOSPITAL;

ACCOUNTS PAYABLE AND RECEIVABLE; DATA COLLECTION; ECONOMICS, HOSPITAL; FINANCIAL AUDIT; FINANCIAL MANAGEMENT, HOSPITAL; HOSPITAL RESTRUCTURING; HOSPITALS, PROPRIETARY; HOSPITALS, PUBLIC; HOSPITALS, VOLUNTARY; HUMANS; INCOME; LONGITUDINAL STUDIES; MEDICAID; MEDICARE PART A; UNITED STATES;

EID: 33845970205     PISSN: 10786767     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (28)

1. P. Reilly, "AHA Reports Hospital Profits are Up for First Time Since 1996," Modern Healthcare, 34, 1: 6-7 (January 5, 2004);
2. see also Standard and Poors, "U.S. Not-For-Profit Health Care Median Ratios," (June 10, 2004), accessed at http://www2. standardandpoor.com on April 29, 2005.
3. See Standards and Poors, supra n.1;
4. see also Center for Medicare and Medicaid Services, "Health Care Industry Market Update: Acute Care Hospitals," Washington, DC (April 29, 2002);
5. Center for Medicare and Medicaid Services, "Health Care Industry Market Update: Acute Care Hospitals," Washington, D.C., (July 14, 2003).
6. Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy, Washington, D.C., (March 2003).
7. See Centers for Medicare and Medicaid Services, 2002 and 2003, supra n.2.
8. The decline in the number of observations over time results in part due to industry changes, including closures and mergers, and in part because some hospitals that reported complete data for 1993-95 had missing data for 1998-00. Specific statistics on these phenomena will be discussed in the results section.
9. W.E. Encinosa and D.M. Bernard, "Hospital Finances and Patient Safety Outcomes," Inquiry, 42, 1: 60-72 (Spring 2005);
10. see also M.G. Harrison and C.C. Montalvo, "The Financial Health of California Hospitals: A Looming Crisis," Health Affairs, 21, 1: 118-126 (January/February 2002);
11. M.D. Rosko, "Performance of Major Teaching Hospitals During the 1990s: Adapting to Turbulent Times," Journal of Healthcare Finance 30, 3: 34-48 (Spring 2004).
12. N.M. Kane, "Hospital Profits, A Misleading Measure of Financial Health," Journal of American Health Policy, 1, 1: 27-35 (July/August 1991).
13. For example, annual comparisons of the data revealed occasional transposition errors (e.g., a hospital having annual expenses about $52 million in a few years with an intervening year having only $25 million) or errors in which values were truncated (e.g., having annual expenses around $50,000,000 in several years and expenses of only $500,000 in one year). Through careful review of year-to-year changes in revenues, expenses, operating income, and net income, such problems were identified. In some instances, we edited the data to correct the problem, such as in the two simple examples noted above. In other cases, hospitals had large, unexplainable variations in data and in these instances, relevant variables were set to missing.
14. G.J. Bazzoli and S. Andes, "Consequences of Hospital Financial Distress," Hospital and Health Services Administration, 40, 4: 472-495 (Winter 1995);
15. see also S.Q. Duffy and B. Friedman, "Hospitals with Chronic Financial Losses: What Came Next," Health Affairs, 12, 2: 151-163 (Summer 1993).
16. Three-year averaging, however, did not result in complete elimination of atypically high or low values of operating margin or cash flow to total revenues. Thus, we needed to develop standards to identify and eliminate outlier values. After inspection of the distributions of the relevant variables, we adopted the outlier rule of the mean plus or minus three standard deviations.
17. For example, S.Q. Duffy and B. Friedman, supra n.9, defined a distressed hospital as having a 5-year average total margin that was negative.
18. G.J. Bazzoli and S. Andes, supra n.9, defined distressed hospitals as having performance on 5 of 8 ratios that was worse than the median financial profile of hospitals that had BBB-bond ratings in 1990. Kane defined distressed hospitals as having negative operating margins that were not offset by investment income.
19. See KM Kane, "The Financial Health of Academic Medical Centers," in The Future of Academic Medical Centers, H.J. Aaron (ed.), Washington, DC: The Brookings Institution, pages 13-47, (2001).
20. G.J. Bazzoli, R.C. Lindrooth, J. Needleman, and R. Hasnain-Wynia, "The Balanced Budget Act of 1997 and US Hospital Operations" Inquiry, 41, 4: 401-417 (Winter 2004/2005);
21. see also J. Feder, J. Hadley, and S. Zuckerman, "How Did Medicare's Prospective Payment System Affect Hospitals?" New England Journal of Medicine 317, 14: 867-873 (October 1, 1987);
22. J. Hadley, S. Zuckerman, and J. Feder, "Profits and Fiscal Pressure in the Prospective Payment System: Their Impacts on Hospitals," Inquiry, 26, 3: 354-365 (Fall 1989);
23. J.M. Mann, G.A. Melnick, A. Bamezai, and J. Zwanziger, "A Profile of Uncompensated Hospital Care, 1983-1995," Health Affairs 16, 4: 223-232 (July/August 1997).
24. See W.E. Encionsa and D.M. Bernard and M.G. Harrison and C.C. Motlvano, supra n.6.
25. We decided to use the numeric thresholds derived from the distribution of the 1993-95 financial data for both study periods rather than redefining the thresholds based on the distribution of the 1998-2000 data. We did so because hospital financial performance was declining over the period, which is evident in Figure 1 of the paper. Given this, if we allowed the thresholds to change between 1993-95 and 1998-00, a hospital defined as financially weak in the initial period could be defined as having moderate performance even though its operating margin or cash flow to total revenues remained the same or declined slightly by 1998-00. A transition from weak to moderate performance in this circumstance did not seem appropriate.
26. Specifically, the Medicare Payment Advisory Commission defines major teaching hospitals as having ratios of interns and residents to hospital beds of .25 or greater. Minor teaching hospitals have values of this ratio that are greater than zero but less than .25. See Medicare Payment Advisory Commission, supra n.3.
27. As noted earlier, differences in sample size between 1993-95 and 1998-00 were due not only to the types of changes noted in Figure 2 but also due to missing data for hospitals that had complete data in 1993-95. Looking over the entire sample of hospitals for each financial measure, about 6 percent of hospitals in the initial period were lost due to the changes noted in Figure 2 and about 10 percent were lost due to missing data in the 1998-00 period.
28. Figures with the results based on classification of hospitals by the cash flow measure are available from the lead author upon request. © 2006 Aspen Publishers, Inc.