Understanding And Using The Report

In today's volatile health care market, it is difficult to get a full assessment of the current status of a hospital or health system, let alone project how it will do in the future. There is no single financial measure that, by itself, indicates the financial health or the financial difficulty of a facility. This report provides some information which can be useful to begin to understand the financial status of a hospital. The various financial ratios identified in this report can sketch an outline of how a particular hospital compares to others in the Commonwealth. They can provide some indication of the relative strength of a facility. The fluctuation in these ratios over time can help form a more accurate understanding of a hospital's condition. A complete assessment depends on even more detailed data and trends, as well as a broader understanding of how that facility fits into its community and the health care marketplace.

The Current Ratio

The current ratio is a measure of liquidity. It is a snapshot at the end of a fiscal year which compares short-term assets to short-term liabilities. A current ratio less than 1.0 means that at the end of the fiscal year, the current liabilities (short-term debt) exceeded the hospital's current assets (short-term assets). Short-term assets are those assets which mature within one year plus debts or payments due to the hospital within one year. In 1996 the median current ratio for Pennsylvania general acute care hospitals with 100 or more beds was 1.58. That means that the median hospital had $1.58 in current short-term assets for every $1.00 in short-term debt.

The Debt To Equity Ratio

The Debt to Equity ratio indicates the financial structure of the organization. It measures the long-term liability (long-term debt) of a hospital relative to the total of all of its fund balances, including endowments and other special purpose funds as well as accumulated equity. A number less than one means that the fund balances exceed long-term debt. The median for general acute care hospitals with 100 or more beds was 0.59, meaning that for every $59 in long-term liability the hospital had $100 in equity fund balances. The 1996 median is slightly lower than the 1995 median. Several factors could account for this, including reduced long-term debt, increased patient revenue, changes in interest rates or growth in endowment funds. If a hospital sustains debt to equity ratios over 1.00 for an extended period of time, it implies that it may be using long-term debt to finance short-term operating expenses. Hospitals that are decreasing their reliance on long-term debt yet improving their short-term liquidity would show decreasing debt to equity ratios and increasing current ratios.

Net Margin & Net Income

Net Income is the amount that total revenue exceeds total expenses. The net income includes revenue from all sources. In addition to patient revenue and other operating revenue, it includes income from investments and non-operating gains. Net Margin is the proportion of total hospital revenue that remains after deducting total expenses. A positive net margin is an indication that a facility has funds remaining after paying its current operational costs.

How To Measure The Viability Of A Facility

The ratios explained above are good indicators of the relative health of a hospital, particularly when compared to other similar facilities. But because they represent a snapshot in time, it is important to look at trends in these ratios over time. These financial indicators also need to be coupled with utilization and other market data, such as admissions, occupancy rate, bed days per thousand population, expenses per adjusted discharge and the facility market share, in order to gain a more complete picture of the fiscal health of a facility. In addition, the nature of the market place, particularly managed care penetration, can have a significant impact on these indicators. In areas with high concentrations of managed care, average lengths of stay, admissions and occupancy rates may actually be declining. But, depending on the nature of the contracts the hospital has with managed care plans, that may not be indicative of a weakened economic condition of that hospital.

Accounting Changes

Effective for fiscal year 1996, the accounting profession instituted several major changes in accounting policies for non-profit institutions. These have a significant impact on the Council's financial reporting and make comparisons with the Council's prior reporting year problematic. These changes result from new Financial Accounting Standards (FAS) 116, 117 and 124.

In general, the accounting profession is trying to make non-profit accounting more like for-profit accounting. These changes affect two areas of the Council's financial report.

Total Operating Expenses:

Operating Income:

Scope Of The Report

Hospitals no longer provide only inpatient services. Nor do inpatient hospital admissions represent the dominant proportion of total medical expenditures that they once did. Hospitals have expanded efforts to become integrated delivery systems and to provide more services than traditional inpatient hospital services.

To capture a bigger picture of medical services, the Council has expanded its financial reporting to include the financial performance of ambulatory surgery centers and health maintenance organizations. These tables can be found at the end of the report.

New Measures

As indicated above, the new accounting standards have made problematic the use of operating margin as a comparative performance indicator. Ideally, the best replacement measure would be one which compares the cost of medical care to the revenue generated from the delivery of patient services. However, those numbers are not available to the Council, and a number of technical accounting issues would need to be resolved before the Council could report such a measure. The Council has settled on a measure which it has chosen to call "Core Income". The related ratio is the "Core Margin". These measures report differences between what the hospital receives in patient revenue and the cost of all services provided by the hospital. For about two thirds of all hospitals in the state this number is negative which means that revenue from patient services was not sufficient to cover their total cost of operation. These hospitals can not cover all of their expenses from patient revenue alone.

However, the reader is cautioned not to draw any misleading conclusions from these numbers. Frequently some of those expenses generate additional revenue to the hospital. A good example is a hospital with substantial grant revenue. The revenue from the grants would not be included in patient revenue however, the expenses related to the grant would be included in the total operating expense of the hospital. Core Income and Core Margin are mechanisms to track the impact of changing reimbursement on the total operation of a hospital.

The Council has also refined one of its measures. In last year's report, the Council introduced the "cost per adjusted discharge". This was an effort to approximate the cost per discharge based on the relative level of inpatient care at the hospital. Several individuals and hospitals pointed out to the Council that this figure did not adjust for the differences in case-mix at hospitals. Case-mix is a measure of the relative resources used by a hospital. Thus, a hospital that performs a higher percentage of resource intensive procedures will have a higher cost per discharge than a hospital that performs a high percentage of less costly procedures. Case-mix adjustment is a method that can account for these differences.

However, case-mix is not a perfect adjustment. For example, this year's report uses the discharge data submitted by the hospitals to the Council for the purpose of calculating the case-mix index. The Council used the same time period for all hospitals and for both years. Thus, we did not calculate a different case-mix for each year, nor did the Council attempt to change the calculation based on the fiscal year of each hospital. At this time, the Councils' inpatient data base is not sufficiently current to permit a calculation based on the most recent fiscal year. The Council plans to correct that problem for future reports.

In addition, not all hospitals submitted to the Council all of the data required under the law. As a result some of the case-mix calculations do not include psychiatric or rehabilitation discharges.

In addition, there is no simple way to adjust for case-mix for those hospitals that have a substantial amount of skilled nursing facility (SNF) activity or long-term care (LTC) activity. The reader should bear that in mind when reviewing the case-mix adjusted cost per discharge for any hospital with a SNF or LTC.

Data Sources

Pennsylvania legislation (Act 89-86 as amended by Act 34-93) requires hospitals to submit financial documents including annual audited financial statements (revenues and expenses, balance sheet, etc.), unaudited government cost reports (e.g., Medicare and Medicaid), and the final Medicare and Medicaid cost settlements. Included in this report are 268 hospitals and 44 surgery centers for 1996, and 270 hospitals and 40 surgery centers for 1995. The ambulatory surgery centers are required to submit annual audited financial statements. A few facilities were unable to provide information due to closure, bankruptcy or other reasons. All data sources had the opportunity to review the data before publication of this report and to make corrections based on supporting documentation provided to the Council.

The annual audited financial statements (AFS) of the hospitals and surgery centers were the primary source for this report. These were augmented as needed by the hospitals' unaudited government cost reports (Medicare & Medicaid). Information about the number of admissions and patient days came from the Medicare cost reports, except for those hospitals which were not Medicare providers. Information about the number of surgical visits came from a report submitted to the Council by the Ambulatory Surgery Centers.

Licensed health maintenance organizations (HMOs) are required to submit reports on paper annually to the Departments of Health and Insurance. This information is available for public review. It is through the cooperation of the Hospital and Healthsystem Association of Pennsylvania (HAP) and the Pennsylvania Medical Society (PMS) that information about HMOs operating in the Commonwealth has been made a part of this report. Each year, both organizations compile and electronically maintain for their members the managed care information submitted by HMOs to the Departments of Health and Insurance. Although only 1995 data are presented in this report, both HAP and PMS maintain a database of this information for prior years for all licensed HMOs in the Commonwealth.

Fiscal Years

Data for fiscal years ending between July 1, 1994 and June 30, 1995 are displayed in the 1995 tables. Data for fiscal years ending between July 1, 1995 and June 30, 1996 are displayed in the 1996 tables. The overwhelming majority of hospitals end their fiscal year on June 30 of each year. Prior year aggregate data have been adjusted for purposes of analyzing statewide trends. All but 27 hospitals and 31 surgery centers follow a fiscal year which begins on July 1 and ends on June 30. These facilities with fiscal year end other than June 30 are footnoted and listed on pages 166 and 168.