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State's Hospitals Bleeding Red Ink

Diane Weaver Dunne

October 05, 2009

More than half of the state’s 30 acute care hospitals lost money last year and nearly a third are experiencing financial distress, according to an annual report by the state Office of Health Care Access.

The report, based on audited financial reports for fiscal year 2008, paints a bleak picture of the fiscal health of the state’s hospitals. Industry experts warn that unless the business models change, the prognosis for the state’s acute care hospitals will continue to be dire.

The recession and decline in the financial markets had a significant impact on Connecticut hospitals’ financial strength in fiscal year 2008. Significant investment losses in the values of stocks and bonds was a key reason the majority of hospitals reported negative margins — the ratio between profits and revenues, a key measure of profitability. Total hospital net assets dropped from $5.1 billion to $4.5 billion year over year, a decline in value of $600 million.

Historically, Connecticut hospitals barely break even financially, averaging 1 percent to 2 percent margins. Hospitals in other states commonly report 6 percent margins or higher, said Stephen Frayne, senior vice president of health policy for the Connecticut Hospital Association, a nonprofit trade association.

In many other states, hospitals have overall operating performances significantly better than Connecticut’s, he said. “If we are squeaking by with 1 to 2 percent margins, typically, we make up for the difference through the return on non-operating incomes through our investments. The fragility of that strategy was played out enormously over the course of this last year. That is an overall strategy that has hurt us badly. You need a total margin of no less than 4 percent.”

Although no hospitals in the country fully escaped the wrath of Wall Street’s dramatic plummet, the number of hospitals in Connecticut experiencing budget shortfalls tripled between fiscal years 2007 and 2008, up from five hospitals to 16.

Nearly all of the Greater Hartford hospitals — Hartford, Saint Francis, John Dempsey, Rockville and Johnson Memorial — reported the poorest financial performances in the state.

University of Connecticut’s John Dempsey Hospitals ranked second in the state in terms of highest negative margin at 6.18 percent in the red. Saint Francis Hospital and Medical Center and Hartford Hospitals weren’t far behind, ranking third and fourth in the state, with 5.5 percent and 5.25 percent negative margins, respectively. The poorest performing hospital in the state was Milford Hospital, reporting a negative 6.29 percent margin.

The negative margins reflect substantial losses, primarily due to losses from investments in stocks and bonds, endowments and charitable contributions, according to the state report.

Locally, Hartford Hospital reported a $40.1 million deficiency of revenues over expenses, Saint Francis reported a $31.7 million deficiency, and John Dempsey reported a $14.9 million deficiency.

Financial Distress

Nearly a third of the state’s hospitals also averaged a negative margin over five years including most of the region’s hospitals, with the exception of Hartford Hospital, which is “indicative of financial distress,” according to the OHCA report.

“[Hospitals] with a negative total margin are not receiving sufficient revenue to pay all of their expenses and must use other sources of funds such as cash reserves or the liquidation of assets to pay their expenses,” the report stated.

The cash reserves or number of days a hospital has cash on hand to run the hospital is telling of the region’s hospitals’ financial fragility. Hartford Hospital has enough cash on hand to run the hospital for five days; Saint Francis has cash on hand to run its facility for 29 days; Dempsey hospital has no cash on hand.

Despite the investment losses, Hartford Hospital reported net assets of $648.1 million — down from $885 million one year earlier. Saint Francis reported $213 million, down from $286 million, and Dempsey reported $52.7 million, down from $67.5 million.

“After nearly a decade of growth, the total number of [patient] discharges statewide declined by over 1,000 from FY 2007 to FY 2008, and this decline in volume, coupled with a negative statewide total margin, is a concern. In the current operating year, hospitals have been reducing costs and putting projects on hold as we wait for the economy to move toward recovery,” OCHA Commissioner Cristine Vogel said in a written statement.

Frayne, of the Connecticut Hospital Association, said the financial performance of Connecticut’s hospitals raise red flags about the fiscal structure of their operations.

Considering that half of all revenues come from government payers — Medicare and Medicaid — that do not compensate hospitals fully for the care they provide, Connecticut hospitals are being set up to fail financially, he said.

The pressure to continually acquire new technology that comes with hefty price tags and to modernize patient facilities adds to their debt loads as well, he added. “There are lots of interconnected blocks that are very disturbing and problematic,” Frayne said. “I think we are in a crisis in the sense that we’ve been stuck for a while in not being able to make significant progress in turning some of these things around.”

10 Worst Connecticut Hospital Margins FY 2008 Hospital FY Total Margin Milford -6.29% Dempsey -6.18% Saint Francis -5.55% Hartford -5.25% Saint Vincent -5.02% Waterbury -4.46% Saint Raphael -3.89% Greenwich -3.54% Johnson -3.19% Day Kimball -3.03% Statewide -0.90% Average -0.50% Source: State of Connecticut, Office of Health Care Access